All the business expense categories you need to know
Tackling tax season without a well-organized record of your business expenses is like trying to assemble a puzzle in the dark — frustrating, time-consuming, and you might turn the light on just to realize you didn’t do any of it right in the first place.
For many small businesses and startups, categorizing business expenses to prep for tax season might not seem like the highest priority task. But putting your business expenses on the back burner can lead to significant financial issues and missed tax savings that directly impact your bottom line.
Read on to uncover the essential business expense categories every business should be familiar with, ensuring you’re set up for success during tax season and beyond.
What are business expenses?
Business expenses are the costs incurred during the day-to-day operations of a company. These can range from tangible assets such as inventory or office equipment to intangibles like fees for legal services or advertising.
Because these expenses are so broad, knowing what does and doesn’t qualify as a business expense is key. That’s where business expense categories come into play. Knowing and utilizing these categories helps business owners plan their finances, save money during tax time, and improve how they run their business.
Business expense categories, defined
Business expense categories are essentially the systematic grouping of these day-to-day business costs to inform your internal finance team and tax filings. They provide a structured way to record and track where money is being spent, making it easier to analyze and budget in the future.
Business expense categories aren’t one-size-fits-all — different businesses have different categories based on what they do. For example, a car repair shop might sort expenses into categories like "Auto Parts" or "Mechanic Tools," but a digital marketing firm might have categories like "Software Costs" or "Client Meetings."
28 business expense categories for businesses of all sizes
To help you figure out which costs qualify as business expenses, we’ve listed 28 common business expense categories to give you an idea of the options available and guide you in choosing the right ones for your business.
1. Advertising and marketing
Advertising and marketing are tried-and-true ways for businesses to expand their customer base and boost sales. Investing in well-planned campaigns can reap significant rewards for brand visibility and recognition, so a dedicated expense category is totally warranted.
Examples: Billboards, social media ads, television ads, signage and brochure printing, podcast spots.
Business types: Virtually any business, from local shops to e-commerce platforms, will have some sort of advertising and marketing expense.
Tax info: Typically, advertising and marketing costs are fully deductible. Keep detailed records of every expenditure, including copies of advertisements and invoices.
2. Bank fees
Running a business often entails various bank-related costs, from account maintenance fees to transaction charges. Set up a company credit card to easily discern personal vs. business-related spending and any corresponding fees.
Examples: Monthly account fees, wire transfer fees, ATM fees, merchant service fees.
Business types: Any business with a bank account, especially those making frequent transactions or international dealings.
Tax info: Generally, bank fees associated with a business account are deductible. Ensure you maintain a separate business account to simplify this process.
3. Business meals
Meeting clients or team members over a meal is a common practice — and one that’s great for relationship building and long-term partnerships. But remember, not every meal can be written off.
Examples: Client lunches, team dinners, and meals during business travel.
Business types: Especially common for businesses in sales, consulting, or any profession where networking and relationship-building are key, but common across all industries.
Tax info: Historically, 50% of the cost of business meals is deductible. However, always check current tax regulations, as these percentages can change.
4. Business use of your car
If you use your personal vehicle for business purposes, you can claim related expenses.
Examples: Travel to client meetings, product deliveries, traveling between worksites.
Business types: Companies with consultants, field sales reps, delivery businesses, or any professions requiring travel.
Tax info: There are two main methods for deducting car expenses: the standard mileage rate or actual expenses (fuel, maintenance, etc.). Remember to always maintain a detailed log, and keep personal and business use separate!
5. Company car usage
Many businesses use company cars for various purposes, ranging from client meetings to product deliveries, which can be costly to purchase, maintain, and fuel. However, you can snatch significant savings during tax season by keeping track of these expenses.
Examples: Purchasing a car to be used exclusively for business purposes, fueling and maintaining the car, tolls, and parking fees.
Business types: Sales companies, businesses with delivery services, construction or trade companies, and/or rental car agencies will typically incur this type of expense.
Tax info: According to the IRS, if you only use your car for business purposes, you may deduct its entire cost of ownership and operation. The IRS is very particular about writing off the cost of vehicles, so if you plan to take a vehicle deduction, keep a detailed log of your business miles and other related expenses.
6. Client gifts
Gifting is a thoughtful way to strengthen business relationships and show appreciation to your clients, but there are limits on how much you can deduct.
Examples: Holiday gifts, thank-you baskets, promotional items.
Business types: B2B enterprises, consultants, agencies, and more.
Tax info: As of the last IRS update, you can deduct up to $25 per gift per client.
7. Continuing education
Investing in further education for yourself or your employees can enhance skills and services, making your business more competitive. Plus, it shows your employees that you’re invested in their growth and may have an effect on employee retention.
Examples: Online courses, seminars, workshops, industry conferences.
Business types: Tech firms, medical practices, or any business in rapidly evolving industries.
Tax info: Costs for education that maintain or improve skills required in your current business are usually tax deductible.
8. Credit and collection fees
These are fees associated with trying to obtain payments from customers or fees paid to third-party services to handle collection.
Examples: Fees paid to a collection agency, and credit card chargeback fees.
Business types: Retailers, e-commerce platforms, and B2B companies offering credit terms (such as buy now, pay later).
Tax info: Generally, these fees can be deducted as business expenses. It's essential to maintain a clear record of all transactions and fees.
9. Charitable contributions
It’s always rewarding and impactful to give back to the community by contributing to charities, but there are guidelines on how these are deducted.
Examples: Monetary donations, event sponsorships, and product donations.
Business types: All businesses, but especially those with a focus on corporate social responsibility.
Tax info: Corporations can deduct charitable contributions up to 50% of their taxable income. Remember, for your donation to qualify for a tax deduction, your chosen charity needs to be a bona fide 501(c)(3) organization.
10. Professional dues
These are fees paid for membership in professional, business, or trade organizations.
Examples: Chamber of Commerce dues, industry association memberships, club memberships primarily for business.
Business types: Professionals such as lawyers, doctors, consultants, accountants, and others who rely on networking to stay updated in their industry.
Tax info: Dues for clubs organized for pleasure aren’t deductible, but professional or trade organization dues are typically fully deductible.
11. Depreciation
Depreciation represents how much of an asset's value has been used, and it allows companies to earn revenue from the assets they own by paying for them over a certain period of time.
Examples: Assets that lose value over time, such as office equipment, machinery, buildings, and vehicles.
Business types: Manufacturing companies, transport businesses, firms with office spaces, or physical stores.
Tax info: You can deduct the cost of a capital asset, but not all at once. The general rule is that you depreciate the asset by deducting a portion of the cost on your tax return over several years.
12. Employee benefit programs
These are perks or benefits given to employees beyond their salaries, helping to enhance job satisfaction and retention.
Examples: Health insurance, retirement plans, stock options, wellness programs, on-site daycare, and dependent care reimbursement accounts.
Business types: Corporations, startups, and other businesses that have a substantial number of employees.
Tax info: Most employee benefits are tax deductible.
13. Employee loans
Some businesses offer loans to employees, usually at favorable interest rates, as part of their compensation package.
Examples: Home loans, vehicle loans, and education loans.
Business types: Large corporations, financial institutions.
Tax info: If the loan is offered at a below-market interest rate, there might be tax implications for both the business and the employee. Proper documentation here is key!
14. Foreign earned income
Businesses that operate internationally may have income from sources outside their home country. In some cases, this income can be left off your tax return — but not always.
Examples: Revenue from overseas clients, income from foreign investments or subsidiaries.
Business types: Exporters, multinational companies, and online service providers with a global clientele.
Tax info: Reporting requirements vary by country. In the U.S., foreign income is subject to tax, but exclusions and credits are available. It's crucial to understand the tax treaties between countries when completing your taxes.
15. Insurance
Insurance protects businesses from unforeseen losses and is often a vital part of any business plan. And the best part? These expenses are generally tax deductible.
Examples: Property insurance, liability insurance, workers' compensation, and health insurance for employees.
Business types: Virtually all businesses need some form of insurance.
Tax info: Premiums paid on most business insurance are deductible. However, specific rules apply to life insurance policies where the business is a beneficiary.
16. Raw materials
Businesses that produce physical goods will have expenses associated with the materials required to create their products.
Examples: Wood for furniture making, metals for machinery, or fabrics for clothing manufacturing.
Business types: Manufacturing companies, artisans, craft businesses, and textile companies.
Tax info: These costs are considered “cost of goods sold” (COGS) and are deductible. Remember, proper inventory tracking and costing methods are crucial for accurate expense reporting.
17. Mortgage interest
Companies that have financed commercial properties through mortgages can deduct the interest from these loans — and you can deduct interest from residential properties (at least in the U.S.) if you meet the right requirements.
Examples: Interest from a loan on a factory, office building, warehouse, or home office.
Business types: Any business that has taken a mortgage on a commercial property.
Tax info: The interest on the mortgage is deductible, but principal repayments are not.
18. Licenses and permits
Operating legally often means obtaining and maintaining various licenses and permits, which can often come at a cost. But the cost is typically deductible.
Examples: Business licenses, health permits, liquor licenses, and professional licenses.
Business types: Restaurants, bars, professionals like doctors or lawyers, and general businesses in most municipalities.
Tax info: The cost of obtaining and renewing licenses and permits is generally deductible. Some may be deducted in the year they're paid, while others may need to be amortized over several years.
19. Maintenance and repairs
Maintaining business properties and equipment is crucial for smooth operations, but maintenance can be costly. That’s why it's essential to budget for these inevitable expenses and stay informed about potential tax deductions to optimize your spending.
Examples: Office repainting, machinery servicing, and HVAC repairs.
Business types: Any business with physical assets, from offices to factories.
Tax info: Routine maintenance and repair costs are deductible in the year they occur. However, significant improvements or overhauls may need to be capitalized and depreciated over time.
20. Office expenses and supplies
Many companies need to purchase everyday items to keep an office running smoothly. Any of those expenses would fall under this category.
Examples: Stationery, printer ink, coffee for the break room, office snacks, and office furniture.
Business types: Almost any business operating in an office setting.
Tax info: These expenses are typically deductible, but remember to differentiate between depreciable office equipment and expendable office supplies. For depreciable office equipment, like computers, furniture, or any higher-value items that will be used longer than one year, companies can deduct a portion of the cost each year over the course of the item’s useful life. For expendable office supplies, like paper, pens, or any lower-value items that will be used quickly, businesses can typically deduct the full cost of these supplies in the year they're purchased.
21. Phone use
You really can’t run a business without communicating with your team, so many businesses have costs associated with phone use.
Examples: Monthly phone bills, cost of smartphones, and video conferencing subscriptions.
Business types: Nearly all businesses, especially those with remote or on-the-go employees.
Tax info: Business-related phone expenses are deductible. If a phone is used partly for personal use, only the business portion is deductible.
22. Utilities
Keeping the lights on, literally, is a recurring cost for many businesses.
Examples: Electricity, water, gas, and trash services.
Business types: Any business with a physical location, including offices, stores, and factories.
Tax info: Utility costs related strictly to business operations are deductible.
23. Shipping
Businesses selling physical goods often incur shipping costs when sending their products to customers.
Examples: Postage, packaging materials, courier services, and freight.
Business types: E-commerce businesses, retail stores, and manufacturers.
Tax info: Shipping costs associated with business products or operations are deductible.
24. Rent
Space costs money, whether you're leasing an office, a storefront, or a warehouse. Regardless, those expenses are tax deductible.
Examples: Monthly lease payments and co-working space memberships.
Business types: Any business that doesn't own its premises.
Tax info: Rent expenses for business purposes are fully deductible.
25. Travel
Traveling for business, be it conferences, client meetings, or otherwise, can lead to essential collaborations, discoveries, and expanded horizons for professionals — but not without some accrued costs.
Examples: Airfare, accommodation, meals on trips, conference tickets, car rentals.
Business types: Companies with consultants, sales professionals, or corporate executives that travel for their jobs.
Tax info: Business travel is deductible, but there are specific guidelines about what can be claimed.
26. Software
More and more frequently, businesses are doing away with outdated manual processes and opting for automated solutions like Expensify to keep their business up and running. Using software is key to streamlining operations, ensuring accuracy, and reducing stress across the board. Plus, our software can create expense reports on the go, making tax season that much easier.
Examples: CRM systems, accounting software, graphic design tools, online cloud storage, and recurring business software subscription costs.
Business types: Almost all, especially tech companies, design firms, and corporate offices.
Tax info: Software expenses can often be deducted, but rules vary depending on whether it's a one-time purchase, a subscription, or custom-developed software.
27. Personal property use
Using personal assets for business purposes can lead to some key business expenses — and resulting deductions during tax season.
Examples: A personal car for business errands, or a home office.
Business types: Freelancers, sole proprietors, or home-based businesses.
Tax info: A portion of the costs related to personal assets used for business can be deductible. Be sure to keep track of personal vs. business use here.
28. Entertainment
Building relationships with clients or rewarding employees sometimes involves entertainment costs.
Examples: Taking clients to a show, or hosting a company retreat or party.
Business types: Sales-heavy businesses, corporations, and agencies.
Tax info: There are specific rules around the deductibility of entertainment expenses, often requiring clear business purposes and documentation.
Taxes and your business expenses
Operating a business involves a myriad of costs, some of which can benefit you come tax season. By understanding how business expenses interact with taxes, you'll be better prepared to make informed decisions throughout the fiscal year.
Let's explore how certain expenses can be deducted from your taxable income while others can't. We'll also cover some strategies to ensure you're keeping accurate records for a smoother tax filing process.
Tax-deductible expenses
A tax-deductible expense can be subtracted from a business's income before it’s subject to taxation, effectively reducing the amount of money the business owes in taxes. Score! This is the government's way of incentivizing certain types of business spending. Some commonly deductible expenses include:
Business use of a car: Mileage or actual expenses related to business travel.
Home office: If a portion of your home is used exclusively for business.
Salaries and wages: Payments to employees, but not owner withdrawals.
Interest: Interest on business loans.
Rent: Rent for business premises or equipment.
Advertising and marketing: Costs associated with promoting your business.
Categorizing and deducting these expenses reduces your taxable income, which can mean a lower tax bill — saving you time, money, and headaches during tax season. Remember, you’ll need to keep clear records and receipts to prove the validity of the expenses.
Expenses that aren’t tax-deductible
Not all business expenses grant you tax breaks. Unfortunately, some costs, although necessary for business operations, can't be deducted. Keep an eye out for these so you can manage your finances more effectively. Non-deductible expenses include:
Owner's salary: Payments to business owners or partners.
Fines and penalties: Paid to the government for violations.
Lobbying expenses: Money spent trying to influence legislation.
Capital expenses: Costs related to business start-up and improvements.
While these expenses aren't tax-deductible, your business can still adopt money-saving and efficient habits like shopping around for suppliers, taking advantage of bulk purchasing discounts, or negotiating better contract terms to help you save money in the long run.
How to track and submit accurate business expenses
Whether you're a seasoned business owner or just starting out, understanding how to track and submit your expenses effectively can make all the difference during tax season. Not only does it ensure you benefit from all eligible deductions, but it also offers peace of mind knowing your financial records are in order in case of any audits.
In the sections below, we'll explore best practices and tools to help you manage this process with ease and precision.
Stay organized with precise categorization
Choosing the right categories for your business expenses will help you keep everything organized during the fiscal year. Once you’ve established your business expense categories, you’ll be able to document each expense and sort it effectively into the right folder, which will save you time when you’re ready to do taxes.
Harness the power of digital tools
Manual processes lead to lost receipts, inaccurate data, and lots of stress. With expense management software like Expensify, each business expense can be digitally logged and categorized with a corresponding receipt, invoice, or note, ensuring you have proof of every penny spent.
Consistently review and categorize
Periodically sift through and classify your expenses to ensure everything is on track. This proactive approach not only preempts tax season stresses but also gives you a clear picture of your financial standing. Expensify's dashboard provides an overview of expenses across all categories, giving you a peek at your financial status whenever you need it.
Work with a licensed tax professional
Knowing the basics of what’s expensable and not and what’s tax-deductible and not is super important as a business owner. To ensure complete accuracy and compliance with IRS guidelines, we always recommend working with a professional who can help answer specific questions about your business’s specific needs. These professionals often use tools like Expensify to help automate business expenses so come tax season, your paperwork is ready to go.
Ready to get prepared for tax season?
Navigating the IRS guidelines is not for the faint of heart, but you don’t have to go it alone. With Expensify on your side, understanding and categorizing your business expenses is easy. Our intuitive tool integrates with your accounting software, simplifying your expense tracking and offering insights into your spending habits year-round. Think of us as your expense management BFF.
So, ready to be friends forever? Get started with Expensify today.
