How Do You Categorize Expenses for a Small Business?

Q: What can you write off as a business expense?

Any expenses considered ordinary and necessary for your business may be written off (i.e., deducted), thereby reducing your taxable income.

Q: What are the biggest kinds of business expenses?

Your biggest business expenses may vary, depending on the business. For some businesses, it might be a commercial mortgage or equipment you need to manufacture products. For many others, payroll may be the largest expense.

Q: How are you supposed to track your business expenses?

The easiest way to track expenses is through accounting software. Most will connect to your business bank account so that your transactions are automatically uploaded. However, you may need to review them to make sure they are categorized correctly.

Q: How do you categorize business expenses?

Business expenses are categorized automatically through accounting software, but you can also manually categorize your spending. Business expense categories include rent, employee salaries, inventory and supplies, travel, marketing expenses, childcare, interest paid on small business loans, and more.

Q: What categories are used for business taxes?

Categories used for business taxes include rent or interest paid on your mortgage, travel, food and entertainment, marketing expenses, interest paid on small business loans, employee wages, vehicle expenses, charitable contributions, and more. To make sure you don’t miss a deduction, it’s wise to categorize all of your business spending.

How Do You Categorize Expenses for A Small Business?

Susan GuilloryUpdated December 23, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

If you run a small business, it’s important to categorize your expenses for tax purposes and to keep track of your small business spending. Many business expenses are tax deductible, which could save you hundreds, if not thousands, of dollars when it comes time to file.Keep reading to learn what business expenses are, how to categorize them, which ones are tax deductible, and more.

What Are Business Expense Categories?

Business expenses include everything from paying rent and utilities to purchasing equipment and supplies to paying your employees. It can even include food and entertainment, travel, and purchasing office supplies.By keeping track of what you spend and categorizing it appropriately, you’ll be eligible for more tax write-offs, which could save you and your small business thousands of dollars.

Why You Need To Categorize Business Expenses

Even if you work with an accountant, it may fall on you to make sure that the purchases you’re making for your business are entered into the appropriate categories in your accounting software.There are, as you’ll soon learn, certain expenses you can deduct from your revenues for the year. That can help you pay less in taxes for your business. But to know how much, you’ll need to know what you spent in different categories so that you can file your taxes correctly with the IRS.What deductible business expenses can do for you is reduce your taxable income. If your revenues last year were $250,000, but you had $50,000 in deductible business expenses, you would pay taxes on only $200,000 in revenue.Categorizing business expenses can also help you keep an eye on where you’re spending money. Running an expense report can show you at a glance where you might be overspending so you can strategize about how best to cut back.Recommended: 5 Small Business Tax Tips for Business Owners

How To Categorize Business Expenses

One good way to categorize expenses as a small business is by using accounting software like QuickBooks or Freshbooks. With programs like this, there will be some preset categories, like travel and payroll, but you may also want to add your own to keep a more detailed account of where you’re spending money.Most accounting software will connect to your bank accounts and upload your transactions. It’s still a good idea to log in every week or month and review your transactions to make sure they’re appropriately categorized.Recommended: 6 Tips for Managing Small Business Finances

What Is a Deductible Business Expense?

As part of learning how to categorize expenses for small businesses, you’ll need to understand deductible business expenses. According to the IRS, in order for a business expense to be deductible, it must be ordinary and necessary.As an example, a vehicle you use for your contracting company would be considered ordinary and necessary for your business to operate. Thus, costs related to it, like interest on the loan and upkeep, would be deductible. But those same expenses for your personal vehicle would not qualify.

10 Key Business Expense Categories

Anything that isn’t considered working capital or cash in your accounting software is an expense. If you learn how to categorize expenses for your small business, your accounting will be easier. Here are a few common business expense categories.

1. Rent

You likely rent office or retail space for your business. You might even have an additional warehouse or storage unit. All of these should be categorized under rent.

2. Vehicle Expenses

If you use one or more vehicles for your business, you can categorize the following as business expenses:

Auto lease
Loan interest
Gas
Mileage
Registration and fees
Insurance
Repairs and maintenance
Parking

3. Advertising

If you pay for advertising or marketing for your business in the form of online ads, radio spots, or even hiring a marketing consultant, these expenses should all fall under the category of advertising.

4. Travel Expenses

Is traveling to see clients or attend trade shows part of your business? You can deduct business airline travel, hotels, rental cars, and meals while traveling when you file your taxes. Just keep all these items categorized under travel.

5. Food and Entertainment

Whenever you take a client out to dinner or host an employee lunch at the office, you’re spending money on food and entertainment for your business, so categorize it as such.

6. Office Supplies

You spend money on paper, ink, pens, printer cartridges, and other office supplies for your business. Create a category for office supplies and make sure all these expenses fall under it.

7. Payroll

Whether you have full-time employees, part-time staff, or contractors, you can categorize all of their wages under payroll. This also includes employee benefits and health insurance.

8. Services and Utilities

This category includes things like internet service and electricity, as well as phone service for your business.

9. Loans

If you’ve taken out a small business loan or line of credit, you may find it helpful to have a category for your loan payments. Keep in mind that only the interest on business loans is deductible on your taxes.

10. Taxes

While it’s not necessary, you may find it beneficial to create a category in your system for taxes that you’ve paid. This makes it so you can easily see how much you’ve paid year to year.Recommended: What Is Business Financial Planning?

Which Business Expenses Are Tax Deductible?

All of the above business expenses are tax deductible. Some expenses are fully deductible, whereas others, such as food, receive a 50% deduction.Other business expenses that are tax deductible include any charitable contributions made through the business, educational expenses such as workshops, courses, and webinars, childcare, and interest paid on investments.

Which Category Does a Home Office Fall Into?

If you work from home, you may be wondering which business expenses are tax deductible and what category a home office falls into. For home-based businesses, you can deduct (or write off) all the business expenses already listed, plus a home office.When you file your taxes, you’ll have two options for how you claim your home office and business expenses.

The simplified option. If you choose the simplified option, you will be asked for the size of your office space. This number is multiplied by a prescribed rate to determine your home office deductions.
The regular method. Because you use a portion of your home for your office, you can deduct a portion of your home’s expenses, including rent or mortgage, utilities, internet, and home repairs. You’ll need to track those expenses and then determine what percentage your home office used, based on its size in proportion to your home’s total square footage.

The Takeaway

Setting up categories for your business expenses can help you pay less in taxes when you look at deductible expenses and it lets you see the big picture in terms of where your company is spending money.Deductible business expenses include rent or interest paid on a mortgage, vehicle expenses, office supplies, marketing, and more. Interest paid on small business loans is also considered a tax deductible business expense.If you’re considering taking out a small business loan, consider Lantern by SoFi. With just a single application, you can receive a small business loan offer from one of our top lenders, all with no obligation to you.

Frequently Asked Questions

What can you write off as a business expense?

What are the biggest kinds of business expenses?

How are you supposed to track your business expenses?

How do you categorize business expenses?

What categories are used for business taxes?

Photo credit: iStock/Lyndon Stratford

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About the Author

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.

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