DEFINITION
Business Expense
Business expenses are the ordinary and necessary costs required to run your business. Anything you spend money on in the name of doing business can be categorized as a business expense.
Every company incurs expenses in the course of doing business. Common examples of business expenses include the cost of goods and services, everyday operating expenses like payroll and rent, and other costs.
The good news is that the majority of these expenses are tax-deductible, meaning you can write them off on your taxes to lower the amount you owe. Expenses are deemed tax-deductible by the Internal Revenue Service (IRS) if they’re “ordinary and necessary” for your business type.
Organizing your expenses into business expense categories, and setting up automatic expense management software to keep track of them, ensures you’ll be fully prepared come tax season—or in the event of an audit.
In this guide, we’ll thoroughly explain the IRS’s definition of a business expense, break down how to record and categorize business expenses, and list 35 common expense categories that are tax-deductible. Plus, we’ll share some helpful tips to automate expense categorization.
What is a business expense? How the IRS defines business expenses
Because business expenses are tax-deductible, it’s important to understand exactly how the IRS defines them. According to the IRS, business expenses are ordinary and necessary costs you incur to run your business. Here’s what that means:
- Ordinary: Common expenses for businesses in your industry
- Necessary: Expenses needed to operate your business, even if they aren’t indispensable
Business expenses are sometimes called deductions because you subtract them from your revenue to determine your taxable income. As such, you record them on your business income statement.
Business expenses vs. personal expenses
Many small business owners and entrepreneurs struggle to separate certain business expenses from personal expenses. This issue becomes even muddier if you’re self-employed. However, there’s one question you can ask yourself to make the distinction:
Did this expense further my business or benefit me personally?
If you spent money for any business purpose, and what you purchased serves a business use, it’s a business expense. If an expense benefits you personally and professionally, then you can split it between business and personal expenses.
Take your cell phone as an example. You may have one phone for both business and personal use. In that case, you wouldn’t be able to deduct the full cost of your phone bill as a business expense. But if you secure a separate phone that you use only for business purposes—even if you’re self-employed—then the full bill for that phone becomes a business expense.
How to record business expenses
As mentioned above, you record business expenditures on your income statement. There are three primary types of expenses used for income statement reporting: direct costs, indirect costs, and depreciation.
Direct costs
These are expenses required to produce goods and services for your customers. Everything from the cost of raw materials to labor costs may fall into this business use category. It's important to note that the expenses used to determine the cost of goods sold cannot also serve as individual deductions.
Indirect costs
These are essential expenses that aren’t directly related to the production of products and services. You may include everything from advertising expenses to compensation for your executives in this category.
Depreciation
This category accounts for your capital expenses by considering the depreciation of business assets over time. The equipment you use to produce your products, the computers you use in your office, and your fleet of business vehicles may all fall into this category.
How do you categorize business expenses?
The three main types of business expenses can be further grouped into various categories, including payroll, employee benefits, , marketing and advertising, research and development, and payments for professional services.
The key is to categorize expenses in a way that reflects your business structure—that is, by department and spend management needs. For example, you can classify expenses by type, like "General and Admin" and "Research and Development," and then sort them by department, like "Marketing" and "Engineering."
There’s no need to overcomplicate the process. Keep categories general and limit the number of general ledger (GL) accounts you have. Use custom fields to capture the who, what, where, and why of each transaction so you can easily sort or reclassify them as needed.
For example, for internal purposes, you may only need to know that an employee made a meal purchase. But if you want to deduct the expense as a business meal come tax time, you’ll need to know if the employee ate alone, with a team, or with a client, and what was discussed.
You may not need an entire category for each of these details, but defining transaction details in your expense management software can make reporting much easier and also helps maximize your potential tax savings.
35 business expense categories that are tax-deductible
Not sure where to start with creating business expense categories? We’ve listed 35 common business expense categories you can typically write off on your income tax returns. Of course, you’ll want to tailor these to your own company’s structure and business operations:
1. Employee benefits
Your company's payments toward employee benefits like health insurance, retirement plans, life insurance, and home office expenses.
2. General and administrative (G&A) expenses
This category includes office supplies like computers, pens, and paper; cleaning services for your office space; and other miscellaneous office expenses. Website hosting and domain payments may fall into this category as well.
3. Rent and leases
Any payments you make toward renting office space, equipment, a warehouse, or vehicles.
4. Marketing and advertising
Anything that covers the cost of directly promoting or marketing your business.
5. Employee training
Skills training for employees is fully tax-deductible as long as the training is for job-related skills.
6. Research and development (R&D)
Costs related to developing and improving your products, including expenses for software directly necessary for developing and testing your product.
7. Legal and professional services
This category includes payments to agencies or contractors—for example, the money you spend on PR agencies, headhunters, freelance designers, CPA services, tax preparation, and legal fees.
8. Utilities
Utilities such as electricity, water, gas, and sewage for commercial space. If you work from a home office, you can deduct a portion of utilities relative to how much of your home you use for business purposes.
9. Salaries and wages
This category includes all payments to employees, including salaries, wages, bonuses, and commissions.
10. Insurance
You can deduct your business insurance premiums, including general liability, malpractice, and commercial real estate or property insurance.
11. Travel expenses
Lodging, airfare, travel insurance, and other costs related to business travel are fully deductible. However, note that you can only deduct 50% of the cost of meals, even while traveling.
12. Depreciation
Expenses related to the depreciation of business assets, such as equipment, vehicles, and buildings.
13. Maintenance and repairs
Any costs you incur to maintain and repair necessary business equipment, vehicles, and facilities.
14. Taxes and licenses
Business taxes, permits, and licenses required to operate legally are deductible. Examples include construction permits or licenses to practice law or medicine in your state.
15. Continuing education
Educational expenses for seminars, workshops, and conferences that promote ongoing education. Educational materials like books fall into this category as well.
16. Software
Business software is usually fully tax-deductible. This includes subscription costs or the outright cost to own the software, including accounting or project management tools.
17. Interest
Interest payments on business loans, business credit cards, lines of credit, debt, or mortgages are tax-deductible in most cases.
18. Dues and subscriptions
Paid subscriptions for industry magazines or academic journals related to your business, as well as dues or membership fees for trade associations.
19. Shipping and postage
Postage or freight costs you incur to ship your products are tax-deductible, as are stamps or postage for sending business-related mail. However, envelopes and packing materials would generally go in the G&A category.
20. Charitable contributions
You can deduct donations you make to charitable organizations, provided they meet the most current IRS requirements.
21. Business use of vehicles
Fuel, maintenance, insurance, and other car expenses are all deductible, provided you use the vehicle exclusively for business purposes. You can also deduct the IRS standard mileage rate.
22. Employee meals and entertainment
You can deduct up to 50% of the cost of meals and entertainment expenses directly related to business activities.
23. Collection fees
You can generally deduct any costs related to trying to collect on a debt, such as hiring a third party to collect what’s owed.
24. Printing
This category can include ink cartridges, physical printers, or payments for printing services—for example, for direct-mail marketing campaigns.
25. Startup expenses
You may be able to deduct a limited portion of the costs associated with starting a new business. These costs might include market research, employee training, business development, and other related expenses.
26. Moving expenses
If you move more than 50 miles from your previous location for work-related purposes, you can deduct 100% of your moving costs.
27. Security
Expenses related to security systems and personnel for your business.
28. Equipment maintenance contracts
Active contracts for the maintenance of business equipment.
29. Inventory
This category includes the cost of goods sold (COGS), including raw materials, finished products, and inventory management expenses.
30. Employee transportation benefits
If you provide transportation benefits to employees, you can deduct these expenses come tax time.
31. Pension contributions
Any contribution to employee pension plans would be a deductible expense.
32. Employee assistance programs
Programs to support employees’ well-being in the workplace or their personal lives.
33. Gifts
Business-related gifts to clients, employees, or vendors are tax-deductible so long as the purpose of the gift is to promote business relations.
34. Bank fees
Expenses related to banking, including monthly service fees for your business bank account.
35. Telecommunications
The cost of business phone and internet services.
How to maximize your business tax deductions
To optimize your expense categories for business tax deductions, you need to know what’s deductible and what documentation is required for compliance when you write off expenses on your tax return.
What counts as a deductible expense will depend on your business structure (LLC, corporation, partnership, etc.) and how you file. For example, the IRS has a list of the major expense categories that are deductible for small businesses specifically. Much of this information was previously consolidated in IRS Publication 535, which was discontinued in February 2023.
Each category has precise requirements for deduction and is subject to change at the discretion of the IRS. So it’s a good idea to subscribe to IRS e-News alerts, review the most recent IRS resources and publications for your business type, and work closely with a tax advisor to maximize deductions.
Taking the time at the start of each tax year to optimize your expense categories and map to ledgers based on IRS changes will make your tax season significantly smoother. Recognizing non-deductible business expenses is essential here, too.
How to make sure your expense categories are correct
So you’ve determined categories that align with your internal finance needs and IRS compliance, but you’re still faced with actually enforcing categorization. Manually processing expenses has proven unreliable and time-consuming. How do you ensure expenses are consistently and correctly categorized?
Startup and small business expense management software can help automate expense mapping and categorization. Software that integrates with modern business expense cards adds another layer of control by providing customizable rules for every business expense.
Custom reporting workflows guarantee consistent documentation by prompting employees throughout the transaction process. Employees are immediately prompted via SMS or email to submit documentation for every transaction.
Once documentation is submitted, automated receipt matching ties it to the corresponding expense and prompts the employee to complete a memo. The expense management software then uses automation and AI to categorize the expense and sync the information with your bookkeeping or accounting software.
Get back your time and money during tax season with Ramp
Saving time and money during tax season shouldn’t be complicated, even if you’re a small business owner or startup founder without a big finance department.
With Ramp’s powerful finance automation and AI behind your business expense categorization, tax season is just another day at the office. Learn more about how we’re saving our customers an average of 5% a year using our software.
