Do the users in the Inactive status take up a license? Will marking a user inactive downgrade their license automatically?

The users in the Inactive status will not use up licenses in Zoho Expense. However, Marking a user inactive will not downgrade their license automatically. You will have to remove them from Zoho Expense. To remove the subscribed users:

1. Switch to Admin View.
2. Click the Gear icon at the top right corner of the page and select Subscription.
3. You will be redirected to the payments page where you can unsubscribe the users.
4. Click Downgrade Add-Ons.
5. Mention the number of users you want to unsubscribe and click Downgrade.