Business Expense Categories: What Every Business Should Know

business expense categories

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