Businesses generate significant expenses that can be challenging to track. If combined with poor bookkeeping, this can make running your business more complicated than needed. But there's another reason you need to organize your business expenses: Figuring out your tax deductions.
To reap the benefits of business tax write-offs, you must account for all the business expenses incurred by your company. Then, you can deduct these expenses from your income, lowering your tax liability. But where does one start?
This article covers everything you need to know about business expenses–categorizing them, which ones are tax-deductible, and why you need business expense categories.
In addition, it is a good starting point to understand how to organize your spending to maximize your tax deductions.
What Are Tax-Deductible Business Expenses?
A tax-deductible business expense is any cost incurred by an organization that can be subtracted from its taxable income, thereby reducing its tax liability. These expenses must be ordinary, necessary, and reasonable for the business to operate.
Some examples of tax-deductible business expenses include
- Salaries and wages paid to employees
- Rent or lease payments for business premises
- Utilities such as electricity, water, and internet
- Depreciation on business assets such as equipment and vehicles
- Interest on business loans
- Taxes and licenses related to business operations
Now, which expenses may be written off will vary depending on the nature of your business. You can start by reviewing IRS Publication 535, which talks about the deductibility of business expenses and the general rules around tax filing.
The IRS also recommends distinguishing between usual business expenses from categories that fall under COGs (cost of goods sold) and capital expenditures to ensure accuracy, as some business expenses cannot be deducted in the year they were made.
What Are Business Expense Categories?
Business expense categories are a structured way of organizing and classifying a company's costs. They provide a clear framework for tracking spending, identifying trends, and making informed financial decisions.
Why Do You Need Business Expense Categories?
The IRS defines business expenses as "the costs of carrying on a trade or business."
Running a business means tracking expenses across departments, projects, cost centers, individuals, and more. This could be a daunting experience. But, if not sorted, these business expenses can become an absolute nightmare once tax season rolls around.
Dividing your expenses by category can help maximize your tax deductions. For example, some business expenses are tax-deductible, so knowing which class each expense falls into enables you to ensure you take advantage of all the deductions.
What's more? Having business expense categories can:
- Provide insight into what, where, and why money is spent
- Enable data-driven decisions around budgeting and cost optimizations
- Document and organize spending plans specifically for investors or lenders
- Provide a bird's eye view of historical, current, and future spend across different expense categories
While doing this manually can hurt your business with manual errors and slips, sorting your expenses into categories doesn’t have to be complicated. You can simply use an expense management software. This doesn't just make it a one-click process but also gathers, interprets, and guides business owners and finance teams to keep track of their business expenses and deductibles.
35 Essential Business Expense Categories
If you’re making a list of business expense categories for the first time or simply need a reminder, here are the most common types you might want to include:
1. Utilities
The good news for those renting a commercial space for their business is that the utilities' taxes are fully deductible. Utilities often include expenses like electricity, water, internet, phone, sewage, and trash pickup.
2. Rent or Mortgage Costs
If you’re paying rent for the office space, you’re likely eligible for a tax deduction on the interest rate. The same applies to mortgage costs. Mortgage interest on real estate you own is generally deductible. However, under certain circumstances, you may need to capitalize the interest instead of deducting it immediately. For more information, read Capitalization of Interest.
All these costs fall under the category of occupancy expenses, which are costs related to the operation of your business. Other occupancy expenses include property taxes, insurance, and office space repairs and maintenance.
Be sure to keep track of all your rental or mortgage loan payments throughout the year and of any other associated costs so that you can accurately report them on your tax return.
3. Office Supplies and Office Assets
Office supplies, including the amount of stationery, cleaning supplies, paper towels, etc actually consumed and used during the tax year and be deducted.
Office assets encompass a wide range of items, including land, buildings, machinery, furniture, trucks, patents, and franchise rights. The entire cost of these assets, including freight and installation charges, must be capitalized. Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules.
(See IRS Regulations section 1.263A-2 for information on these rules. )
4. Business Trip Expenses
Business trip expenses are tax-deductible, but the IRS has strict rules about what qualifies as a business trip expense. Firstly, the trip’s primary purpose must be to conduct business activities, such as meeting with clients or suppliers, attending conferences and trade shows, or training employees. If the business trip has a mix of business and personal expenses, ensure you report the right ones to get the correct deductions.
Generally, you can deduct any expense considered necessary for business. Tax-deductible business trip costs include flights, gas, hotels, meals, and parking fees. Remember that only half of the tax gets written off when it comes to meals.
Also Read:
5. Marketing
Advertising expenses that are directly related to your business activities can be deducted. You can also deduct the cost of goodwill advertising done to keep your name before your audience if it directly relates to the business you expect to gain in the future.
6. Employees’ Salaries
Business owners can deduct the salaries of their employees as a business expense. This deduction also includes any bonuses, wages, commissions, or other noncash compensation like vacation allowances or fringe benefits made to workers.
Keep in mind that in order to be deductible, your employees’ pay must be reasonable and necessary for conducting business to qualify for a deduction. The pay must also satisfy the following tests:
- Test 1. It must be reasonable.
- Test 2. It must be for services performed.
Test 1 - Reasonable
Factors to consider to determine whether the pay is reasonable:
- Job Duties: The nature and complexity of the work performed.
- Workload: The volume of work handled and the level of responsibility.
- Business Complexity: The intricacy and demands of the business operations.
- Time Commitment: The amount of time dedicated to the role.
- Cost of Living: The prevailing living expenses in the area.
- Employee Performance: The individual employee's skills, experience, and accomplishments.
- Compensation Equity: The employee's pay relative to the company's overall profitability and shareholder distributions.
- Company Pay Policy: The established pay structure and compensation guidelines for all employees.
- Pay History: The individual employee's salary progression over time.
Test 2 - For Services Performed
You must be able to prove that the payments were made for services that were actually performed.
7. Employee Training
If you’re offering skills training to your employees, you’ll be able to deduct tax. This includes the cost of sending employees to training courses and providing in-house training. The only restriction is that the education must be for job-related skills your business requires.
8. Business Insurance
Liability insurance, worker's compensation, disability, and other business-related insurance are deductible. However, commercial auto insurance is a bit more complex; if you use the vehicle solely for commuting, it doesn't count as a business expense. On the other hand, driving the car for business reasons but still using it for personal purposes will likely grant you a partial tax deduction.
Listed below are some other deductions you can make for premiums if you pay for the following kinds of insurance:
- Property and casualty insurance: Covers losses due to fire, theft, accidents, or other unforeseen events.
- Credit insurance: Protects against losses arising from unpaid customer debts.
- Health and medical insurance: Covers employees' medical expenses, including long-term care. For partnerships, premiums paid for partners are deductible as guaranteed payments.
- Liability insurance: Safeguards against legal claims resulting from damages or injuries caused by your business activities.
- Malpractice insurance: Protects healthcare professionals against claims of professional negligence leading to patient harm.
- Workers' compensation insurance: Mandatory insurance that covers employee injuries or illnesses arising from work-related activities.
- Unemployment insurance contributions: Deductible if considered taxes under state law.
- Overhead insurance: Covers business expenses incurred during prolonged disability due to personal injury or illness.
- Vehicle insurance: Covers business vehicles for liability, damages, and other losses. If a vehicle serves both personal and business purposes, only the portion attributed to business use is deductible. If using the standard mileage rate for vehicle expenses, no insurance premium deduction is allowed.
- Life insurance: Deductible if covering officers or employees, provided you are not a direct or indirect beneficiary.
- Business interruption insurance: Compensates for lost profits due to temporary business disruptions.
9. Bank Fees
Businesses can deduct bank fees as business expenses. This includes maintenance, business loan interest, and insufficient funds fees. Therefore, keeping track of these expenses is essential to stay organized and optimize deductions come tax time.
10. Gadgets
You must include the gadgets you need to purchase for your business as a business expense category. You can deduct the cost of these items as a business expense if used for work-related purposes.
You can also deduct the cost of computers, tablets, or cell phones from your taxable income. However, if you use them partially for personal purposes, then you likely won't get more than half of the amount deducted.
11. Printing Expenses
Self-employed individuals can get a tax deduction on printing expenses necessary to run their business. This includes the cost of paper, ink, and other supplies used for printing business-related documents. Additionally, self-employed workers can deduct the cost of repairs and maintenance for printers and other office equipment.
12. Software Expenses
Software used for business purposes may be eligible for a tax deduction. These costs consist of purchasing and installing software and paying subscription fees.
The deductible amount will depend on the type and use of the software in your business. For example, accounting or project management software falls into this category. Therefore, if you use accounting software to track your expenses, you can deduct the entire cost when tax season comes. However, if you use the software for personal purposes as well, you can only deduct a portion of the cost.
13. Website Expenses
Nowadays, having a website is crucial for running a successful business. The good news is that you can get tax deductions for web hosting and domain fees. The IRS hasn’t outlined the rules for this category yet, but it can be put in the advertising category.
14. Internet Expenses
The internet is a necessary tool for most businesses. It allows them to stay in touch with clients, customers, and suppliers, research new products and services, and promote the business. As a result, the IRS considers internet usage to be a tax-deductible business expense. So remember this the next time you’re on a flight and need to purchase an internet package to stay in touch with clients.
15. Presents
This may come as a surprise, but you can get a tax deduction if you buy presents for your business associates, clients, or employees. This encompasses everything from small tokens of appreciation to more items such as vacations or jewelry. As long as the gift is given to promote business relations, it’s considered a valid deduction.
16. Continuing Education
This includes courses you take for continuing education or seminars just to stay on top of changing trends in the industry. All materials, books, and registration fees made for you and your employees are tax-deductible. Additionally, you can also deduct the payments you make to employees to reimburse them for relevant educational purposes.
These payments can be deducted if they are part of a qualified educational assistance program. You can deduct them on the “Employee benefit programs” or any other appropriate line of your tax return.
17. Credit And Collection Fees
Organizations that use the accrual method of accounting, where revenue and expenses are recorded as they’re incurred even if no money changes hands, are allowed to deduct unpaid invoices as bad debt for the business. Any amount spent in trying to collect debt, even hiring an external organization to collect what’s owed, also counts.
18. Dues And Subscriptions Expense
Subscriptions to industry journals and magazines related to the niche of your business can also be deducted from taxes.
19. Maintenance And Repairs
Businesses that use fleet vehicles for their operations can claim deductions for the percentage used for business purposes. When calculating actual vehicle expenses, you can factor in gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) proportional to the total business miles driven. Alternatively, you can opt for the standard mileage rate
Moreover, repair and maintenance expenses for other types of equipment and machinery employed in your business are also deductible. Some examples of repairs include:
- Reconditioning floors (not replacement)
- Repainting the interior and exterior walls of a building
- Cleaning and repairing roofs and gutters, and
- Fixing plumbing leaks (but not replacement of fixtures)
20. Legal And Professional Expenses
Any kind of fees paid to CPAs, financial planners, lawyers, and other professionals can be deducted.
21. Telephone
All telecommunications fees within a commercial space can be deducted. You can also deduct additional phone lines in a home office, and cell phone contracts as a sub-category of your office expenses.
22. Postage And Shipping
Shipping costs, such as stamps, freight, and postage fees incurred while mailing business-related items, including products shipped to customers and return shipping labels, are eligible for deductions. Envelopes and packaging materials are considered office supplies and can also be deducted.
23. Printing
Payments for printing services, printers, and ink cartridges are included in this category. Keep in mind that if you use direct-mail marketing, you can also deduct the cost of producing the materials.
24. Utilities
The following utilities are full-deductible–internet, electricity, sewage, and trash pickup charges. For a home office, you can deduct the proportion of how much of these utilities are used for business purposes.
25. Moving Expenses
If you move for work-related purposes, you can deduct 100% of your moving costs as long as you pass the distance test–your new job location needs to be at least 50 miles from your previous location.
26. Depreciation
Big ticket items like deducting the expenses of machinery or a vehicle over its lifetime use instead of a single tax year.
27. Charitable Contributions
Cash payments to an organization, regardless of its charitable status, are deductible as business expenses if they are directly related to your business operations and are not charitable contributions or gifts. Charitable contributions or gifts cannot be deducted as business expenses.
For example - You paid $200 to a local youth sports league to sponsor their annual fundraiser dinner. The purpose of the sponsorship was to increase brand awareness and attract new customers to your business. Your payment isn’t a charitable contribution. You can deduct it as an advertising expense.
28. Child And/Or Dependent Care
If you meet the IRS requirements, you can deduct the qualifying costs associated with child or dependent care.
29. Startup Expenses
Startup expenses are defined as the amounts that are paid for:
- Creating an active line of trade or business
- Investigating the creation or acquisition of an active line of trade or business
A startup cost can be written off if it meets both the following conditions:
- Active Trade or Business Expense: A cost incurred to operate an existing business in the same field as the one you entered into.
- Pre-Opening Expense: A cost paid or incurred before the start date of your active trade or business.
Startup costs also include amounts paid for the following:
- Market Research: Analyzing potential markets, products, labor supply, transportation, and other relevant factors.
- Opening Promotion: Advertising the business's launch to attract customers.
- Employee Training: Salaries for employees and instructors involved in pre-opening training.
- Business Development Expenses: Travel and other costs associated with securing distributors, suppliers, or customers.
- Professional Services: Fees paid to executives, consultants, or other professionals for their services.
30. Mortgage Interest
You can deduct the interest incurred in purchasing a building or taking out a loan to improve your home for business purposes.
Keep in mind that some expenses you pay to obtain a mortgage cannot be deducted as interest. These include:
- Mortgage commissions
- Abstract fees
- Recording fees
These expenses are capital expenses.
31. Books And Magazine Subscriptions
While newspapers may not be tax deductible, magazines, books, and journals specialized directly to your business may be.
32. Foreign Earned Income
If you run a business overseas, you may be eligible to exclude a portion of your foreign income from your tax return, known as the foreign earned income exclusion. However, individuals cannot deduct or credit foreign taxes paid on income exempt from U.S. tax under the foreign earned income exclusion or the foreign housing exclusion.
For details on these exclusions, see Publication 54. For information on the foreign tax credit, see Publication 514.
33. Medical Expenses
All self-employed individuals who pay for their own medical care and insurance can deduct these expenses.
You can also deduct the cost of medical, dental, and qualified long-term care insurance for your spouse, and your dependents. Health insurance coverage can extend to a child under age 27 at the end of 2022, even if they're not your dependent.
34. Licenses And Permits
All required licenses and permits are tax-deductible.
35. Manufacturing Or Raw Materials
COGs (cost of goods sold), or items and storage paid to sell are all tax-deductible. The following are the types of expenses that go into COGs:
- Materials and Freight: The cost of raw materials and freight incurred to obtain them.
- Storage: Storage costs for inventory and finished goods.
- Direct Labor: Wages paid to workers directly involved in product manufacturing, including pension or annuity plan contributions.
- Factory Overhead: Indirect manufacturing costs associated with the factory's operation, such as utilities, maintenance, and depreciation.
For more information, see Cost of goods sold—chapter 6 of Pub. 334.
How To Categorize Expenses for Your SMB or Startup
You can categorize your business expenses in three easy steps:
- Determining the correct expense categories for your business
- Reconciling and reviewing your financial accounts
- Assigning a category to all your transactions
Let’s look at each step in greater detail:
1. Determine Expense Categories For Your Business
Your expense categories will vary depending on your industry. For instance, an online store may have dedicated business expense categories for storage and shipping while a SaaS organization may have for digital services.
For starters, identify the expense categories your organization uses the most–use a financial statement for reference here or even the list above to help you.
2. Reconcile And Review Your Financial Accounts Regularly
Regularly reviewing your financial accounts can help you maintain control over your business expenses. You can use an accounting tool or an expense management software to simplify your bank or credit card reconciliation process.
Some businesses opt for a business-only credit card to help them manage expenses better.
3. Assign A Category To All Transactions
Once you have a list of all the categories, look at all your current business spending and assign all deductible expenses. Remember to make note of all deductions where receipts are required.
Also Read
What Else Can I Deduct as a Business Expense?
Work Opportunity Tax Credit (WOTC)
The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers who hire individuals from certain targeted groups who have faced significant barriers to employment. Some of these groups include:
- Veterans
- Recipients of Supplemental Nutrition Assistance Program (SNAP) benefits
- Recipients of Supplemental Security Income (SSI) benefits
- Young people ages 16-24 who are not in school or working
- Ex-felons
You can claim a credit of up to $2,400 for each eligible employee you hire. The credit is equal to 40% of the first $6,000 of qualified wages paid to or incurred on behalf of an individual who:
- Are in their first year of employment;
- Are certified as being a member of a targeted group; and
- Perform at least 400 hours of services for that employer
Empowerment Zone Employment Credit
The Empowerment Zone Employment Credit is a federal tax credit available to employers who hire individuals who live and work in designated empowerment zones. Empowerment zones are economically distressed urban and rural areas that have been designated by the federal government for special tax incentives and revitalization efforts.
You can claim a credit of up to $2,100 for each eligible employee you hire. The credit is equal to 20% of the first $10,500 of qualified wages paid to the employee in the first year of employment.
New Markets Tax Credit
The New Markets Tax Credit is a federal tax credit available to investors who invest in businesses and projects located in low-income communities. The credit is equal to 39% of the qualified investment made by the investor.
Employer Credit for Paid Family and Medical Leave
The Employer Credit for Paid Family and Medical Leave is a federal tax credit available to employers who provide paid family and medical leave to their employees. The credit is equal to 100% of the wages paid to eligible employees on leave, up to a maximum of $5,112 per employee per year.
Note: The credit is effective for wages paid in taxable years beginning after December 31, 2017, and before January 1, 2026.
FAQs Around Business Expense Categories
What Can Be Written Off As A Business Expense?
Any expense that counts as ordinary and necessary to conduct business can be deducted as a business expense.
What Can’t Be Written Off As A Business Expense?
Personal expenses, expenses related to client entertainment, fines or penalties paid for violating the law, illegal payments, and dues to various country clubs cannot be written off.
Can You Deduct Job Expenses?
If you have reimbursed your workers for relocation or other costs, you can deduct the reimbursement as an expense.
Is There A Small Business Start-Up Costs Tax Deduction?
Business can write off start-up costs as long as they’re directly related to getting the start-up up and running. You could deduct up to $5,000 for a start-up and an additional $5,000 for organizaitonal expenses.
Can I Take The Standard Deduction And Still Deduct Business Expenses?
Yes. Even if you take the standard deduction, you can still deduct business expenses.
What Are Different Types Of Expenses?
There are three different types of expenses: fixed, variable, and periodic.
- Fixed expenses: Expenses that don’t change in the upcoming future, like rent or mortgage payments.
- Variable expenses: Expenses that change from month to month, like utilities.
- Periodic expenses: Expenses that happen occasionally like for emergencies or business travel.
Use An Expense Management Software to Categorize Business Expenses
An expense management software like Fyle automates expense categorization, and removes any manual effort for finance teams and employees alike. Also, for the first time ever, you can submit receipts via text messages using Fyle’s real-time credit card feeds!
What Are Real-Time Credit Card Feeds?
Fyle’s real-time credit card feeds directly integrate with credit card networks like Visa and Mastercard to bring transaction data directly to your expense management system as soon as a business credit card is swiped. This means accountants don't have to wait for bank statements to arrive or chase employees for receipts.
The following details are made available in Fyle as soon as an employee swipes their card:
- Amount
- Currency
- Date
- Merchant Name
- Merchant Category Code (MCC)
With access to multiple data points around a single card transaction, Fyle can help you:
- Instantly track and match receipts
- Extract and code expenses accurately
- Catch fraud without any manual intervention
Let's dive deeper into how exactly Fyle uses real-time feeds to assign business expense categories automatically:
Automatic Coding of Receipts Submitted via Text Messages
- When an employee swipes their business credit card and makes a transaction, the card networks instantly send the transaction details to Fyle.
- Fyle reads the data and initiates a text message to the employee, informing them about the spend and requesting them to reply with a picture of the receipt.
- At the same time, Fyle automatically creates an expense and pre-fills the amount, currency, date, and merchant name using the RTF data. With the availability of Merchant Category Code, the category also gets auto-filled. To automatically assign merchant categories, all you’d need to do is pre-define merchant-based expense rules in Fyle.
Merchant-Based Expense Rules
- If merchant-based expense rules are enabled in Fyle, expense fields like Category, Project, Purpose, Department, Location, or Custom fields will be filled automatically based on the Merchant identified from the card transaction or receipt.
- A sample expense form with the following expense rule applied: If Merchant is Uber, set Merchant to 'Uber Technologies,' Project to 'Project 1', Category to 'Taxi,' and Purpose to 'Travel to client's location.
- This saves employees' time and effort, especially with recurring expenses, and your accountants don't have to spend hours verifying every expense to ensure it is coded correctly and in line with the GL accounts.
Receipt Collection Via Other Everyday Apps
- Fyle also lets you submit receipts through other everyday apps like Slack, Gmail, Outlook, Teams, and its native mobile app. Fyle will instantly extract key information and automatically assign expenses to their relevant categories.
Automate Receipt Collection and Business Expense Categorization with Fyle
By automating the entire process of receipt collection and expense report submission, Fyle eliminates manual data entry and reduces the risk of errors, ensuring accurate expense categorization.
This means all your receipts are stored digitally in a secure location, which can benefit your business in the following ways:
- Receipts are the only proof of expense for businesses. It enables you to identify taxable and non-taxable expenses.
- Receipts can ensure you’re able to easily track all deductible expenses so you can claim them on time.
- Also, remember that the IRS requires receipts as proof of expense for any transaction above $75.
Experience effortless receipt management and IRS compliance with Fyle. Schedule a demo today!
.webp)
