Schedule C Line 23: Taxes and Licenses Deduction Explained for Freelancers (2026 Guide)

Published: May 15, 2026 · Reading time: 9 min

TL;DR: Schedule C Line 23 (Taxes and licenses) is for state and local taxes and license fees that are ordinary and necessary for your business — business license renewal, professional licenses, state payroll taxes you paid as employer, state franchise tax, LLC annual fees, real-estate tax on business-owned property. It is not for federal income tax, self-employment tax, sales tax collected from customers, or property tax on personal-use assets. A typical freelancer's Line 23 is $100–$1,200 (license fees + LLC annual report); freelancers with an EIN, payroll, or business property can hit $3,000–$15,000.

Line 23 is one of the most miscategorized lines on Schedule C. Freelancers routinely try to deduct their state income tax there (wrong — that's Schedule A), or to add sales tax collected from customers (wrong — that's a wash, never on Schedule C at all), or to book their self-employment tax (wrong — SE tax is calculated on Schedule SE and you only deduct half of it as an above-the-line adjustment, not on Schedule C). This guide draws the lines cleanly enough that you can apply them in 60 seconds per receipt.

What Line 23 Is and Isn't

The Schedule C instructions for Line 23 are short:

You can deduct on this line the various federal, state, local, and foreign taxes directly attributable to your business (as ordinary and necessary business expenses).

That phrasing carves out exactly five common buckets:

• ✅ State and local business license fees (annual renewal)
• ✅ Professional license fees (cosmetology, real estate, contractor, CPA, bar dues, medical license)
• ✅ State / local payroll taxes you paid as the employer (state unemployment, state disability employer portion)
• ✅ State franchise tax, LLC annual report fees, business privilege tax, state-of-organization renewals
• ✅ Real-estate tax and personal-property tax on business-owned, business-used property
• ❌ Federal income tax (never deductible)
• ❌ Self-employment tax (Schedule SE; half is an adjustment, not a Schedule C expense)
• ❌ State personal income tax (Schedule A, subject to SALT cap)
• ❌ Sales tax collected from customers and remitted (wash — keep it off Schedule C entirely)
• ❌ Property tax on your personal residence (Schedule A; only the home-office share flows via Form 8829 to Line 30)
• ❌ Foreign income taxes you elected as a credit on Form 1116 (can't double-dip)

What Qualifies: The Common Categories

1. Annual business license and professional license fees

If your trade requires a state-issued license to operate, every renewal is a Line 23 deduction:

The initial fee to enter a new trade (your first CPA exam, first bar admission, first medical license) is not deductible — that's a personal cost to qualify for a new profession. Renewals of an existing license are 100% deductible because they maintain an existing trade.

2. State and local payroll taxes (if you have employees)

If your Schedule C business has W-2 employees, the employer portion of state-level payroll taxes goes on Line 23:

• State unemployment tax (SUTA)
• State disability insurance (CA SDI employer portion, NJ TDI, NY SDI employer share)
• State workers' compensation tax (where it's a tax; otherwise on Line 14)
• State paid-family-leave employer contributions
• Local payroll / head taxes (Denver OPT, Newark payroll tax, San Francisco payroll expense tax)

The federal payroll taxes — FICA, FUTA — are also deductible on Line 23 (they're the employer's expense, separate from what's withheld from employee wages). The W-2 employee wages themselves go on Line 26 (Wages), not Line 23.

3. State franchise tax, LLC annual reports, business privilege tax

State-level taxes you owe just for legally operating the business:

• California $800 LLC franchise tax → Line 23
• Delaware franchise tax → Line 23
• Texas franchise / margin tax → Line 23
• Tennessee business tax → Line 23
• Massachusetts annual report → Line 23
• New York biennial statement → Line 23
• Florida sunshine state — no franchise tax, but annual LLC report ($138.75) → Line 23
• City / county gross-receipts tax (LA, San Francisco) → Line 23

These are ordinary and necessary because the business literally can't operate without them.

4. Real-estate and personal-property tax on business property

If you own business property (not lease), the property tax on it is a Line 23 deduction:

• Real-estate tax on a standalone office, studio, salon suite you own → Line 23
• Personal-property tax on business vehicles (the percentage attributable to business use) — Line 23 if the vehicle is on Line 9 actual-expense method; baked into $0.725/mile if standard method
• Personal-property tax on business equipment (states like VA, MO, MA tax business equipment) → Line 23
• Inventory tax (states like LA, MS) → Line 23

The split is sharp: personal real-estate tax on your residence → Schedule A (capped at $10,000 SALT). Business real-estate tax on a separate business property → Line 23. Home office? Goes through Form 8829 at the business-use percentage to Line 30.

What Does NOT Go on Line 23

Federal income tax — never

Your federal income tax bill (Form 1040 Line 24) is never deductible against business income. Same for federal estimated tax payments (Form 1040-ES). Same for any IRS penalty.

Self-employment tax — half is an adjustment, not on Line 23

Self-employment tax (Schedule SE) is the 15.3% on net Schedule C profit. The deductible half goes on Schedule 1 Line 15 as an above-the-line adjustment — not on Schedule C Line 23. Booking SE tax on Line 23 would actually reduce your Schedule C profit, which would reduce next year's SE tax base, which is exactly the kind of circular-logic disallowance the IRS catches. See the self-employment tax explainer.

State personal income tax — Schedule A, not Line 23

Your state income tax bill is an itemized deduction on Schedule A, subject to the $10,000 SALT cap. It is not a Schedule C business expense — even if your sole income is the Schedule C profit.

Sales tax you collected from customers — wash, not Line 23

If you sold $20,000 of widgets and collected $1,600 of sales tax for the state, the cleanest approach is:

• Schedule C Line 1 gross receipts: $20,000 (not $21,600)
• No Line 23 deduction when you remit the $1,600

That's a complete wash. If you mistakenly booked the gross with sales tax on Line 1, you'd offset it by deducting the remitted tax on Line 23 — but keep sales tax out of the books from the start and the line stays clean.

Sales tax YOU paid on a business purchase — included in the purchase

The $84 sales tax on a $1,200 monitor you bought for the business is part of the $1,284 expense that lands on Line 22 (Supplies / software). It is not a separate Line 23 entry.

Property tax on personal residence (even with a home office)

Property tax on your home is a Schedule A itemized deduction (SALT-capped). Only the business-use percentage flows through Form 8829 to Line 30. See the Form 8829 walkthrough and Line 30 home office guide.

Personal property tax on personal-use vehicles

The personal-use percentage of personal-property tax on your vehicle is not deductible at all. The business-use percentage is deductible only if you use the actual-expense method on Line 9. Under the standard mileage method ($0.725/mile in 2026), property tax is baked into the rate. See the Line 9 standard vs actual guide.

Line 23 vs. Other Schedule C Lines That Sound Similar

The Line 23 confusion mostly comes from lines with overlapping language. The decision tree:

Note: NAR / MLS / association dues are professional dues, traditionally booked on Line 27a (Other expenses) — not on Line 23. A common mistake for first-year realtors and CPAs is to dump everything tax-shaped on Line 23.

Real-World Examples

Example 1 — Solo freelance designer, no employees, no business property

• City of San Francisco business registration: $146
• California LLC franchise tax: $800
• California Statement of Information: $20
• DBA renewal: $26
• Total Line 23: $992

A single-line entry that takes one minute to capture and represents nearly $300 of tax savings at typical freelance brackets.

Example 2 — Real estate agent, no employees

• State real-estate license renewal: $245
• NAR + state Realtor association: $640 → Line 27a (Professional dues)
• Local MLS subscription: $660 → Line 27a
• City business license: $90
• LLC annual report: $138.75
• E&O insurance: $440 → Line 15
• Total Line 23: $473.75 (NOT $1,773.75 — dues and insurance go elsewhere)

Example 3 — Booth-renting hair stylist with one part-time W-2 employee

• State cosmetology license renewal: $85
• City business license: $75
• State unemployment tax paid (SUTA, employer portion): $156
• State disability employer portion: $44
• LLC annual report: $50
• Total Line 23: $410

The part-time employee's actual wages go on Line 26. Federal FUTA and the employer FICA portion are also Line 23 entries.

Example 4 — Freelance software developer with EIN-only office (rented, not owned)

• City business license: $130
• State LLC franchise tax: $300
• LLC annual report: $50
• Professional engineering license (if applicable): $260
• Total Line 23: $740

Office rent lands on Line 20b (Rent or lease — other business property), not Line 23. The leased office's property tax is the landlord's problem; the tenant only pays rent. See the Line 20 rent or lease guide.

Documentation Rules for Line 23

The IRS expects three things if Line 23 is audited:

1. The receipts or payment records. Annual license invoices, state franchise tax confirmations, LLC annual report receipts, payroll tax filings (Forms 940 / 941 / state equivalents). Retain for the standard three-year statute of limitations (six years if you under-report income by 25%+). Digital images are accepted under Rev. Proc. 97-22.
2. A simple ledger. A one-line entry per item with date paid, payee, amount, and which authority (state of California, City of Austin, Delaware Secretary of State). Excel is fine; a category in your tracker is better.
3. Consistency year over year. The same fee on Line 23 last year should be on Line 23 this year. Sudden moves between Line 23 and Line 27a without explanation are a soft audit flag.

For a tracker that captures every business license, franchise tax, and payroll tax receipt and maps it to Line 23 automatically, see the Schedule C expense tracker overview.

A Faster Workflow for Line 23

Most freelancers learn the Line 23 boundaries the hard way — by getting it wrong once and having a CPA reclassify everything in April. The fix is to tag at the moment of payment:

• Annual license renewal email arrives → forward to receipt inbox → tag Line 23
• LLC franchise tax payment confirmation → tag Line 23
• Sales-tax remittance to the state → tag No Schedule C entry — wash

CentSense's vision-model OCR auto-maps most of these on capture; for the rest, a quick tag at the time you pay the bill keeps January categorization-free. See the best apps to track business expenses for the comparison.

Authoritative References

• IRS — Schedule C (Form 1040) Instructions
• IRS — Publication 535: Business Expenses
• IRS — Publication 334: Tax Guide for Small Business
• IRS — Topic 503: Deductible Taxes
• IRS — Topic 554: Self-Employment Tax

For the full Schedule C line-by-line map, see Schedule C Lines: The Complete 2026 Guide and How to Categorize Expenses for Schedule C.