Categorizing expenses isn’t just about prepping for tax season. Proper categorization of your business expenses can prepare you for a future of growth and savvy financial management. Each and every business expense needs to be documented in a way that allows you to quickly assess your finances and liquidity level and maximize tax deductions.
Even if you’re a business owner who believes your business isn’t large or complicated enough for developing a documentation process, we recommend starting with some simple categories that will benefit purchasing, budgeting, and your yearly tax write-offs.
What are business expense categories?
Business expense categories are “buckets” for your company’s spending that help you organize your finances. They’re essential for several reasons, including:
- Showing you where your money is going
- Defining budgets for your department heads
- Highlighting places where you could be more efficient
- Helping you prepare for tax season
Most of your expenses will fall into the same main categories, but it’s worth taking the time to customize your chart of accounts. Creating enough categories to label every transaction and source of income—no matter how rare—can provide helpful insight into your business spending.
Common business expense categories
Expense categorization needs to be straightforward so everyone from employees recording business expenses to the finance team utilizing accounting software knows exactly where money is going. Using expense management software like BILL Spend & Expense lets you share the burden of categorization with employees, so your accountants don’t have to waste their time chasing down spenders.
Common business expense categories include:
For most businesses, payroll constitutes the largest share of the budget. Create a payroll expense category to easily identify and filter out the fixed expense of payroll, and help you track trends in the variable cost of hourly, fluctuating payroll wages. Learn how to set a pay schedule that works best for your business.
Benefits include all of the non-wage perks offered to employees. The benefits you offer will be different than other companies, and the offerings may change over time. Still, it’s critical to note all of the benefits-related expenses so you can track your spending over time and see which give your employees the highest return on investment. Common benefits include:
- Insurance (health insurance, dental, vision, life, disability)
- Vacation days
- Sick days
- Child care
- Gym or fitness allowances
- Education & training
- Subscriptions or memberships
This is not an exhaustive list, so be sure to properly categorize any businesses expenses that are designed solely for rewarding, attracting, and benefiting employees.
Rent & utilities
The overhead costs of your business are critical to keep the lights on—literally. These expenses can be fixed or variable costs, but they are necessary to run your business. Tracking these over time can help you notice trends or cost creep, as well as deductions come tax time. Most rent and utilities can be tax-deductible if deemed “ordinary & necessary” by the IRS. This category might include:
- Rent or Mortgage
- Trash collection
Marketing & advertising
Create a category solely for the marketing and growth of your business. Be sure to track any expenses related to advertising, whether it’s radio, print, internet, mail, or television. If your business uses social media, email, visual display, or paid click marketing it would fall in this category as well. Expand the umbrella to include any additional production costs, such as hiring a video crew to produce a commercial.
No matter the type of workplace, you’ll likely need to purchase items regularly for day-to-day productivity. These are considered an office expense. Office supplies could include computers, printers, furniture, paper products, kitchen supplies, and even snacks and drinks.
Meals & entertainment
Your company’s meal and entertainment expenses are the most likely to be abused and least likely to be reported correctly. Still, these expenses may be tax-deductible and will be the first place to cut when you’re in a tight spot, so categorizing these expenses correctly is vital.
This category would include meals provided to employees, such as a team lunch or the annual company Thanksgiving dinner before the holiday, as well as meals for clients when the sales team is courting a new account. An entertainment expense usually covers large events, such as a company party or taking clients to a sporting event.
Filing a meal expense report is notoriously tedious. Meal receipts are easily lost before an expense report is even filed, so consider your expense reporting process and make the switch to digital expense reporting software if possible. Actively managing, categorizing, and budgeting for the meals & entertainment expenses in your company can keep purchases in check.
A travel expense is incurred whenever business takes place outside of your normal workplace. It could include flights, lodging, food on the road, cabs or car rentals, and mileage reimbursement.
The T&E expense category will be dependent on the standard mileage rate for computing reimbursements and mileage deductions. You’ll want to consider all different types of travel expenses, from travel arrangements made by your travel or accounting teams down to the out-of-pocket expenses your employees submit after their business trip.
For many businesses, vehicles are part of the day-to-day operations and can contribute expenses in a significant way. From cars to trucks to specialized vehicles for your industry, your rental or loan payments on these vehicles and any other costs associated with them need to be classified and tracked. In this category you’ll find traditional costs associated with normal car expenses:
- Lease or loan payments and interest
- Registration fees and taxes
- Maintenance and repairs
- Parking fees, tolls, and storage
It makes much more economic sense to contract out some responsibilities to dedicated professionals. Instead of adding a full-time accountant or lawyer on retainer to your payroll, you may pay project fees or contract rates to these professionals as needed. Services that can be outsourced might include:
- Media production
- Tax preparation
List of business expenses
To get you started, here are a few examples of business expense categories that many businesses include in their accounting structure. Be sure to check with your accountant when it comes to your own list so you don’t miss any tax deductions.
What is not considered a business expense?
While you’re sorting and labeling your expenses, it’s important to distinguish between business and non-business expenses. Not only is this critical for reimbursements and tax deductions, but it’s a way to keep your spending in check and prevent occupational fraud.
Personal vs. business expenses
For small businesses, it’s common for the business owner to have considerable overlap between their business and personal finances. Vehicles might be used for both business and personal reasons, and so can a home. Breaking up the cost by percentage of use can help you more accurately categorize what is a business expense and what is personal. For example, tracking the miles you drive specifically for your business or the amount of space in a home dedicated to business operations can help you itemize for deductible business expenses.
Tax deductible business expenses
The practice of categorizing your expenses comes in particularly handy when tax season arrives. The IRS allows businesses to deduct costs incurred throughout the year which are ordinary and necessary to the business. As you can imagine, your small business expenses are largely ordinary and necessary for your industry, so the amount of your deductible expenses is quite high.
Seven of the most common deductible business expenses are:
- Mileage and vehicle expenses
- Entertainment expenses
- Rent and utilities
- Marketing expenses
- Employee pay and benefits
- Miscellaneous or general office expenses
Categorizing your expenses allows you to quickly itemize these lists and provide totals that you need for filing at the conclusion of your tax year and claiming every tax deduction to which you’re entitled. Maximizing your tax return is well worth the effort.
Categorizing with expense management software
All of these categories and tax talk can be intimidating, but utilizing an expense management software application can make categorization easy and intuitive. Expense management software helps in the following ways:
- Tracking expenses
- Managing budgets
- Importing information from expense reports, bank accounts, etc. automatically
- One click or suggested categorizations
- Easy sorting by category, date, amount, or user
- Visual interpretation of spend and budgets