Schedule C Line 23: Taxes, Licenses, and Sales Tax Rules

Line 23 of Schedule C is where a sole proprietor deducts the taxes and license fees paid to run the business during the year, including the employer share of payroll taxes, state unemployment contributions, property taxes on business assets, annual business and professional licenses, and certain excise, franchise, and sales taxes.¹ The total flows into Line 28 with your other expenses, and from there into the net profit or loss on Line 31 that drives both your income tax and your self-employment tax.²

What Belongs on Line 23

The IRS instructions group the allowable items into a few clear categories.¹

Payroll taxes you pay as the employer. The employer share of Social Security (6.2% on wages up to $184,500 in 2026) and Medicare (1.45% on all wages) is deductible here.³⁴ Only the employer-match portion, not the amounts withheld from employee paychecks. If you claimed the Form 8846 credit for employer Social Security and Medicare taxes on certain employee tips, reduce your Line 23 amount by that credit.

Federal and state unemployment taxes. The federal unemployment tax (FUTA) is 6.0% on the first $7,000 of each employee’s wages, reduced by a credit of up to 5.4% for state unemployment contributions, so the effective federal rate for most employers is 0.6%.⁵ Contributions to a state unemployment fund, and to a state paid family and medical leave program, also belong on Line 23 so long as your state treats them as taxes.

Property taxes on business assets. Real estate taxes on business property and personal property taxes on equipment, machinery, and business vehicles are deductible here. The personal property tax has to be ad valorem — based on the property’s assessed value and charged annually — so a flat vehicle registration fee that ignores value does not qualify.⁶ The $10,000 SALT cap (raised to $40,000 for most filers starting in 2025) applies only to personal itemized deductions on Schedule A and does not limit business property taxes on Schedule C.⁷

Annual licenses and regulatory fees. General business operating licenses, professional renewal fees for CPAs, doctors, contractors, and the like, health inspection permits, and zoning-related permits all fit here, provided the license is required for the business.

Other business taxes. Federal highway use tax, excise taxes, franchise taxes, fuel taxes, and occupational taxes paid in connection with the business are deductible on Line 23. State and local sales taxes imposed on you as the seller belong here as well — but that category needs its own explanation.

Sales Tax: Who Owes It Matters

Sales tax is the item filers most often put in the wrong place. The treatment depends on who the tax is legally imposed on.¹

If the tax is imposed on you as the seller, deduct it on Line 23. When you collect that tax from the buyer, include the collected amount in your gross receipts on Line 1.
If the tax is imposed on the buyer and you merely collect and remit it, leave it off Line 23 and leave it out of gross receipts. It is not your income and not your expense. If your state lets you keep a portion of what you collect, report that retained amount as income on Line 6.

Most states put the legal obligation on the buyer, so most sellers are in the pass-through camp. Putting those amounts on both sides of the return inflates gross receipts and deductions by the same figure. The net profit does not change, but the mismatched size of the numbers can attract attention.

Sales tax you pay when you buy property for use in the business is a separate matter. Those amounts get added to the property’s cost basis rather than deducted on Line 23.

What Does Not Go on Line 23

Federal income tax is never a business deduction.⁸ Keep the following off Line 23 as well:

Estate and gift taxes.
Taxes on your home or other personal-use property. If part of your home qualifies as a home office, the business share of those taxes runs through Form 8829 and lands on Line 30, not Line 23.⁹
Assessments for local improvements such as paving, sidewalks, or sewer lines that increase your property’s value. Add those to the property’s basis.
Taxes and fees unrelated to the business.
Sales tax on equipment or other property you buy for the business, which becomes part of the asset’s cost.

Under Section 263A, if you produce goods or hold inventory for resale, some indirect costs including taxes may have to be capitalized into inventory rather than expensed on Line 23.¹⁰

Licenses That Must Be Amortized Instead

Standard annual licenses go straight on Line 23. Licenses that grant a right lasting longer than one year are treated differently. The Schedule C instructions specifically flag liquor licenses as an example that may need to be amortized rather than deducted in the year paid.¹ Under Section 197, a license or permit granted by a government unit is generally an intangible amortized over 15 years.¹¹ A license acquired separately with a fixed term of less than 15 years is excluded from Section 197 and can be amortized over its actual term. In practical terms, a transferable taxi medallion or multi-year liquor license belongs on Form 4562, not Line 23.

Where the Numbers Come From

Line 23 is a single total, so the work is in pulling the components together. For payroll taxes, reconcile your quarterly Form 941 filings against your annual Form W-3 to confirm the employer share of Social Security and Medicare paid for the year.¹² Your Form 940 shows FUTA paid.¹³ Property tax figures come from county assessment notices or payment receipts. License fees come from renewal notices from the issuing agency. The categories most often missed are state unemployment contributions and personal property taxes on equipment.

How Line 23 Feeds the Rest of Schedule C

Line 23 is one of roughly 20 expense lines in Part II. Everything in Part II totals to Line 28. Any home office deduction from Form 8829 lands separately on Line 30. Net profit or loss comes out on Line 31 and flows to Schedule 1 of Form 1040 for income tax and to Schedule SE for self-employment tax.²

Records to Keep and Penalty Exposure

The IRS generally expects you to keep records supporting a return for at least three years from the filing date.¹⁴ For Line 23, that means payroll tax returns, property tax bills, license invoices, and sales tax records.

Overstating Line 23 by including federal income tax, personal taxes, or sales tax that should have been capitalized is the kind of error that draws a 20% accuracy-related penalty when the understatement of tax is more than the greater of $5,000 or 10% of the tax that should have been shown on the return.¹⁵ Tying every dollar on Line 23 to a specific allowable category, with the paperwork to back it up, is what keeps the number defensible.

1
Internal Revenue Service. Instructions for Schedule C (Form 1040) (2025)
2
Internal Revenue Service. Schedule C (Form 1040) 2025 – Profit or Loss From Business (Sole Proprietorship)
3
Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
4
Social Security Administration. Contribution and Benefit Base
5
Internal Revenue Service. Topic No. 759, Form 940, Employers Annual Federal Unemployment Tax Return
6
Office of the Law Revision Counsel. 26 USC 164 – Taxes
7
Internal Revenue Service. Topic No. 503, Deductible Taxes
8
Office of the Law Revision Counsel. 26 USC 275 – Certain Taxes
9
Internal Revenue Service. About Form 8829, Expenses for Business Use of Your Home
10
Office of the Law Revision Counsel. 26 U.S. Code 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses
11
Office of the Law Revision Counsel. 26 U.S. Code 197 – Amortization of Goodwill and Certain Other Intangibles
12
Internal Revenue Service. Instructions for Form 941 – Completing and Filing Form 941
13
Internal Revenue Service. 2025 Instructions for Form 940
14
Internal Revenue Service. Topic No. 305, Recordkeeping
15
Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments