Taxes & Licenses
Yes, you can deduct taxes — sometimes. Learn which government fees reduce your taxable income and which ones the IRS strictly prohibits.
A guide by Taxstra Tax & Accounting — CPA-led tax strategy for business owners
Line 23 is for taxes and licenses directly related to your business trade. This is one of the most confusing lines on Schedule C because the IRS has strict rules about what does not count — including federal income tax and your own self-employment tax.
Deductible vs. Non-Deductible
The clearest way to understand Line 23 is through a side-by-side comparison. Before you record anything here, verify it appears in the deductible column.
| Tax or Fee | Deductible? | Result |
|---|---|---|
| State & Local Sales Tax | YES — if included in gross receipts (Line 1) | 100% deductible |
| Business Licenses | YES — LLC fees, DBA registrations, professional renewals | 100% deductible |
| Real Estate Taxes (business property) | YES — on a shop, warehouse, or office | 100% deductible |
| Payroll Taxes (employer share) | YES — employer's share of FICA/Medicare for W-2 employees | 100% deductible |
| Federal Income Tax | NO — never deductible | $0 |
| Self-Employment Tax | NO — deducted on 1040 Schedule 1, not here | $0 |
| State Income Tax | NO — typically an Itemized Deduction (Schedule A) | $0 |
| Traffic Tickets & Fines | NO — penalties to government are never deductible | $0 |
Pro Strategy: The SALT Cap Workaround
Under the One Big Beautiful Budget Act (OBBBA), the SALT deduction cap was raised to $40,000 for married filing jointly ($20,000 MFS), indexed annually ($40,400 for 2026). The cap phases down for taxpayers with MAGI above $500,000, to a floor of $10,000. This still impacts many high earners in high-tax states.
How PTET Works (Step by Step)
- 1. You elect into your state's Pass-Through Entity Tax (PTET) program.
- 2. The business pays the state income tax at the entity level.
- 3. The business deducts that payment on the federal return — uncapped, bypassing the SALT limit.
- 4. You receive a state tax credit on your personal return for the tax already paid.
Note: PTET requires an S-Corp or Partnership structure. Basic Schedule C filers are not eligible. Contact us to evaluate whether converting to an S-Corp makes sense for your income level.
Audit Traps on Line 23
The Problem: You just deducted an expense you never claimed as income. If you exclude sales tax from Gross Receipts (Line 1), you cannot also deduct the payment on Line 23. The IRS will flag this as a double dip.
The Problem: Line 26 (Wages) includes the employee's share of FICA that you withheld. Line 23 is exclusively for the employer's matching portion. Putting the employee's withheld taxes here is double-counting — an easy win for auditors.
Frequently Asked Questions
High State Taxes? Let's Model the PTET Savings.
If you pay more than $10,000 in state income taxes, the PTET election may unlock a federal deduction you are currently leaving on the table. Book a free 30-minute call and we will run the numbers.
Find Out What You're Overpaying in Taxes
Book a free 30-minute call to walk through your situation. We'll tell you exactly how our CPA-led team can help — and whether we're the right fit.