Business Expense Categories: What Every Business Should Know

Business expense categories can be confusing for small business owners — especially with all of the other responsibilities you have to juggle. 

But once you understand how they work, business expense categories can be a useful tool to keep you organized, on track towards your goals, and on budget. In fact, they can actually help you save money.

Here’s everything small business owners need to know about business expense categories.

What are Business Expense Categories?

Simply put, business expenses are the costs it takes to run a business. The IRS defines them as “the costs of carrying on a trade or business,” as long as the intention of the business is to make a profit.

Many costs incurred by businesses and employees are tax deductible, if they are deemed “ordinary and necessary,” and are calculated and documented properly.

So, business expense categories refer to the sorting of expenses under umbrellas that are applicable to individual businesses. For example, a bakery that bakes and delivers goods locally would have significantly different expenses than a metal parts manufacturer that ships all of its products internationally.

Business expense categories can include everything from legal fees to advertising costs to vehicle expenses, but we’ll get more into that later.

Why business expense categories matter

Tax deductible business expenses can save companies lots of money annually. But in order to reap the deductions, businesses must keep their expenses orderly. Establishing and maintaining categories of expenses makes filing much easier come tax season. You’ll immediately be able to see how much money was spent in which categories, making it simple to ensure you are within the IRS limits.

Business expense categories are also a helpful way to see an overview of your company spending and where the majority of your spend is being allocated. This can help with forecasting and budgeting for future fiscal years.      

When are business expenses tax-deductible?

As mentioned before, the IRS defines tax deductible business expenses as costs incurred that are “ordinary” and “necessary” to carrying out business. More specifically, Publication 535 states:

“An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”

So, as long as you stay within the limits of the IRS guidelines, most business-related expenses will be tax deductible.

Common business expense categories list

As previously mentioned, different businesses will have different expense categories. What is legitimate and reasonable for one company may be cause for suspicion (and audit) at another.

These are just some of the most common and wide-ranging business expense categories.

Rent

If you rent office space or warehouse space for your business, those payments are tax deductible. If you operate out of your home, you can also calculate the percentage of your home that is exclusively used for business purposes and that portion of your rent or mortgage is deductible.

Utilities

Phone service, internet, heat, electricity, water, and municipal service fees for an office space can also be claimed as tax deductible. For home offices, like with rent, you must calculate the portion of these utilities that is exclusively used for business purposes.

Office Expenses

Office expenses refers to costs incurred to conduct business in the office, and can include computer equipment, printers, phones, etc. These can all be deductible from your annual taxes.

Office Supplies

Office supplies, meanwhile, refers to smaller tangible objects used in the office like pens, paper, cleaning supplies, staples, notebooks, and even snacks and beverages for employee break rooms or kitchens. In some instances, depending on the price, office furniture can also be included as a deductible expense.

Advertising and Marketing

All advertising costs for small businesses are tax deductible. This includes ad space in print or online media, the cost of printing ad material, social media ad campaigns, contractors hired to write and design ads, production costs for commercials, sponsored content, and any other material or campaigns purchased for the purpose of promoting the business.

SaaS Subscriptions

Software as a service subscriptions that are needed to run the business are tax deductible. These can include web hosting services, email marketing platforms, accounting software, enterprise resource planning (ERP) software, customer relationship management (CRM) software, HR programs, etc.

Training and Education

Courses, programs, and seminars that are designed to keep employees knowledgeable and engaged in relevant fields are also deductible. This includes registration fees, books, and other educational materials that are required for the training and education programs.

Vehicle Maintenance/Repairs

Depending on your business’s use of company cars or trucks, you may be able to deduct gas, oil, repairs, tires, insurance, parking, tolls, registration fees, licenses and depreciation (if the car is used at least 50% of the time for business). If a vehicle is used for both business and personal travel, be sure to log mileage for both, as only the business travel will be deductible.

Travel Expenses

Travel expenses are the cost of business-related trips, and can include flights, hotels, transportation, and meals. It is crucial to maintain detailed and accurate information about each transaction being claimed. If tracked correctly, travel expenses can be deductible come tax time.

Printing

Costs for printing material necessary to conduct business are eligible for deductions. This can include printers, ink cartridges, and third-party printing costs for business-related materials.

Shipping

Shipping, even if handled by a printer or manufacturer, should be categorized as its own expense. Postage, stamps, and freight charges for products sent to customers and return shipping labels can all be deducted as shipping expenses. Envelopes and packaging should be categorized under office supplies. 

Legal and Professional Fees

According to the IRS, “Fees charged by accountants and attorneys that are ordinary and necessary expenses directly related to operating your business are deductible as business expenses.” Legal fees related to business should be separated from personal legal fees, even if they appear on the same invoice.

Licenses/Permits

The costs to renew required professional licenses for you and your employees are deductible. Regulatory fees for your trade or business paid annually to state or local governments are generally deductible, as well.

Bank and Interest Fees

Bank fees, such as those required to maintain a business account or overdraft fees on a corporate account, are deductible. Interest paid on loans, credit lines, and business credit cards is also deductible.

What to consider when setting up business expense categories

Business expenses span a wide range of categories, but you should set them up in a way that makes the most sense for you. You’ll want to consider:

Your Business

Different industries will rack up different business expense types. A cosmetic company that sends employees door-to-door will likely need to purchase and maintain vehicles for workers, but will likely have very little need for office supplies and may only need to pay rent and utilities on a warehouse for the product rather than a full-fledged office.

A tech start-up, meanwhile, will probably need to spend more on computer equipment for their employees and SaaS subscriptions to help employees complete their jobs to the best of their ability — whether they gather at an office space or operate remotely.

Whatever makes the most sense for you, according to your business expenses should be fine. Just be sure to have an organized system, supplemented with clear documentation of any expenses.

Your Accountant

Your accountant may have tips and tricks from their experience to make the categorization process simple for everyone. They will also have a good handle on what expenses are and are not deductible for a small business. As long as your categories are clearly defined and all expenses are verified with matching receipts, your accountant will likely be able to work with your organization system.

The IRS

Your accountant can be a great resource here, as well, but you’ll want to consider the IRS. By following their guidelines from the get-go, you’ll know what you can and cannot claim for tax deductions. Following the rules will help you stay organized, make your accountant’s job easier, and ensure that you have nothing to worry about in the event of an audit.

Publication 535 is an invaluable resource when it comes to planning and filing business expenses.

How to maximize tax deductions for small businesses

Keep detailed records of all expenses

The first step you can take to maximize tax deductions for your small business is to keep detailed and accurate records of all of your business expenses. If you don’t have receipts for business-related transactions or can’t justify how an expense was necessary to conduct business, you’ll be in trouble if your company gets audited.

By keeping detailed logs of expenses with matching receipts, however, you can properly deduct business-related costs, ultimately saving you significant amounts in taxes. 

Research business startup costs

In some cases, businesses are able to deduct expenses from the creation and set-up of a new business. If your total startup or organizational costs are less than $50,000, you can deduct $5,000. If either type of cost exceeds $50,000, your deduction will be reduced by the difference between the startup costs and the $50,000 limit.

Seek out government tax credits 

A bit of research can go a long way. Seeking out government assistance in the form of tax credits can also help you maximize your tax deductions. 

Especially in the wake of COVID-19 challenges, there are programs like the Employee Retention Credit and Paid Leave Credit that can help small businesses cover the additional costs created by the pandemic.

The Work Opportunity Tax Credit (WOTC), meanwhile, is a Federal tax credit available to employers that hire individuals from certain groups who face significant barriers to employment, such as veterans and people with disabilities.

Tools to help make sure expenses are categorized correctly

It may seem like a lot of work to create and sort all of your business expenses, but there are tools to make it easier. Here are some of the existing tech tools that will help you make sure everything gets tracked and sorted accurately.

Accounting software

Accounting software is key to helping your finance team balance books on a monthly, quarterly, and yearly basis. Most will come with pre-generated categories that you can use as-is or customize to your needs. It’s a good way to get an overview of how much is being spent in which categories, so you can adjust budgets or alter spending accordingly.

Expense tracking software

An expense tracking software collects and stores copies of receipts. Switching to digital receipt records makes everything more searchable, saves space, and allows you to integrate receipts with your accounting software.

Virtual corporate cards

Virtual corporate cards make tracing and storing receipts for business expenses even simpler. Employee access can be controlled prior to purchases being made, and all spending is centralized within the company account. This eliminates the need to consolidate expenses from an array of personal credit cards and different corporate cards.

Virtual corporate cards are convenient (you don’t have to pass around a physical card between employees), have enhanced fraud prevention features, and allow companies to control spending by imposing limits and approval flows on cards before purchases are made.

Mesh Payments for business expenses

Mesh Payments can help you create and organize your business expense categories. In addition to integrating with most major accounting platforms, Mesh provides automated expense management. This eliminates the need for receipt collection and manual data entry on spreadsheets.

Unlimited virtual cards allow expenses to be sorted into categories as they’re incurred. Businesses can create individual cards for different expense categories, ensuring the right accounts are being used to make the right purchases. For example, companies can create separate cards for vehicle payments, office supplies, utility bills, and SaaS subscriptions, making it easy to categorize purchases and identify issues as soon as they arise.

Finance managers can see all transactions as they are made, and can set spend limits and expiration dates on each individual virtual card. Real-time visibility prevents employees from hiding fraudulent or personal purchases under “miscellaneous” spending accounts, and ensures that any suspicious activity is flagged quickly.

Controls make sure your team stays on budget and all transactions are approved by the appropriate managers. Insights, meanwhile, inform you of how much and where money is being spent, and can even alert you to duplicate SaaS subscriptions or cheaper alternatives.

With visibility, controls, and insights, you get a clear overview of all of your business’s expenses in one place. From there, the possibilities for optimizing your company’s spend are endless.

Schedule a demo to learn how Mesh Payments can help you organize your business expense categories and save your company time and money.

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