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A Beginner’s Guide to Business Expense Categories

10+ min read • Apr 19, 2021 • Derek Miller

As your business grows, so too will your expenses. These expenses will range from minor travel costsfilling up a rental car tank, for exampleto major investments like real estate or new equipment. 

If you want a clear picture of how your money moves within your business, then you need to start by sorting and categorizing your expenses.

Expense categories provide a variety of benefits for small business owners. Not only do they make budgeting easierthey can also streamline business tax filing. This guide will go over the benefits of keeping clear business categories and discuss which categories you might want to consider using. 

What Are the Benefits of Categorizing Business Expenses?

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Assigning categories and sorting expenses might seem like a big task—especially with all the other decisions and activities you have on your plate—but the value of having visibility into your spending cannot be overstated.

First, business categories can help you to set clear budgets and identify wasted spending. For example, if a business owner sets a $10,000/month operating budget, they won’t know why they went over or under that goal unless they can see their monthly spending quickly and easily.

Additionally, if you have to scale back that budget, you can prioritize the spending and decrease or remove the least important expenses—for example, subscription services you rarely use. Categorizing business expenses gives you the power to optimize your spending more efficiently.

Creating categories can also help you when it’s time to file your taxes. There are countless items that can be deducted from your taxes as business expenses when you file: everything from a box of company-branded pens used for marketing to insurance premiums. 

By categorizing expenses, you and your accountant can quickly pull a list of charges from the year and submit them for deductions. This process reduces the stress of filing taxes while helping you to take advantage of all your deductible expenses.

Good organization through expense categorization isn’t just an industry best practice. It’s a proven method to help you save money, make better decisions, and lead your business to success. 

The following are common expenses that businesses have, which you can consider adding to your expense categories when setting up your bookkeeping infrastructure. 

Rent, Mortgage, and Home Office Payments

Rent and mortgage payments will be one of your most consistent fixed monthly expenses. These are also essential expenses for business owners who have brick-and-mortar locations. Because these costs are typically the same month over month, they make easy examples of expenses that canand shouldbe categorized automatically.  

Rent and mortgage payments are tax-deductible, and so are other office space-based expenses. For example, the amount you pay for a coworking space can count as rent. The costs related to a home office are also deductible—usually calculated by the square footage of your home office relative to your overall home or apartment. 

The IRS has created guidelines for qualifying a space as your home office to help you know what can be claimed. 

Utilities

Utilities include the internet, water, and electricity costs required to keep your business operational. These are also charges that can be auto-categorized because they typically have similar cadences. Some utility costs may be static, like your monthly internet bill, while others will fluctuate, like your electricity costs.

Tracking your electricity costs can also help you to determine whether your business could benefit from additional infrastructure investments. The government offers tax credits for companies and individuals that install solar panels, which could make your location less dependent on the electric company. 

Furniture and Office Supplies

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The supplies category covers every expense related to the daily operation of your office. These expenses are deductible for your business because they’re considered essential operating costs. 

This category will likely have several subcategories underneath it so you can better assess what expenses are driving costs. A few subcategory examples include:

  • Cleaning fees: a static monthly cost for a service to clean your office nightly. Cleaning expenses will likely increase as a result of returning to the office following the pandemic. 
  • Basic supplies: a monthly budget set for minor office supplies like paper, whiteboard markers, and printer ink.
  • Furniture: a monthly stipend for replacing and updating furniture, including employee chairs that have broken and waiting area couches for customers. 
  • Major office investments: a nest egg allocated each month to cover office improvement projects like repainting a room or replacing the carpet. 

As you can see, there’s a big difference between buying a pack of pens and repainting your office—which is why subcategories can be helpful.

Equipment and Machinery

If you create products within your factory or workspace, then you’ll need equipment and machinery to produce the items for sale. A brewery would include various bottling and label makers in the equipment category, while a salon owner would list hairdryers and swivel chairs. 

This category might start out as one of your largest and most expensive sections when you first open your doors: you’re buying essential items and just starting to pay them off. However, your budget can decrease over time to cover only upgrades and machinery replacement when your initial investments age beyond repair. 

Vehicle Expenses

Vehicle expenses are eligible if your company has a delivery van, company car, or other vehicles used for business purposes. In theory, this category could also apply to golf carts or ATVs if you invest in them for exclusive business use, like travel across your facility or for maintenance purposes. 

These expenses include monthly payments on the vehicles themselves, auto insurance, and gas. You can also include upkeep and repair costs associated with your vehicles.

Maintenance and Repairs

Along with infrastructure investments, business owners can deduct maintenance and repair costs for their companies. This is another instance where having subcategories can help you. A few examples of these expenses include:

  • Routine HVAC maintenance and cleaning
  • Emergency plumbing repairs
  • Specialized equipment repairs 
  • Maintenance of fleet vehicles, like oil changes and tire rotations

Some business owners set a budget each month for repairs and choose a different project to spend the money on: March might be reserved for HVAC cleaning, while the fleet vehicles get their 6-month oil changes in April. 

Marketing Expenses

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Marketing expenses can be incredibly diverse, dynamic, and hard to categorize. They cover everything related to web design and maintenance, social media, digital promotions, and giveaways. Marketing expenses include the SEO software you pay for and the branded magnets you give out at local events. 

While your marketing expense category is diverse, you can still budget for various costs and forecast when you’ll need to spend more. For example, retailers double or triple their marketing budgets in November and December to attract customers during the holiday season. They might also increase their budgets in the fall to buy branded merchandise in preparation for their biggest months or to complete upgrades to their websites and digital presences. 

A few subcategories in your marketing section might include website maintenance, SEO, social media management, merchandise, traditional media, and event sponsorships. 

Client Gifts

Client gifts can be added as a marketing subhead, but some companies prefer to create a separate category to understand how much they spend each month. Client gifts include thank-you cards for doing business, holiday gifts, and giveaways for those who buy your products. 

Professional Services

There are a variety of professional services that business owners use to stay in operation. An entrepreneur might keep a lawyer on retainer to help review contracts and protect the best interest of the business. A business owner might use a bookkeeper to balance the ledgers each month. Not only are these services valuableand often static, if your service provider charges a monthly feethey’re also tax-deductible. 

Technically, the marketing agency you hire to develop a promotional plan could also fall under this category, but some business owners prefer to keep it next to their other advertising expenses. 

Business Travel Expenses

Depending on your business plan, you may accumulate a significant amount of travel expenses or very little. Some B2B brands travel to multiple conferences each year to promote their services. Travel expenses usually include hotel costs, airline tickets, rental car fees, and food per diems. Conference tickets and booth fees could also go here, or they can fall under the marketing category.

As you start to accrue business travel expenses, make sure you develop company policies for employee spending. For example, will employees have the same per diem and hotel limits in New York City, a much more expensive area, than in the more affordable Omaha? How will your staff be compensated for gas mileage? These processes can help you to budget for different trips more easily.

Postage and Shipping

The number of transactions you have in this category will depend on the type of business you own. If you operate a local brick-and-mortar business, then this category will be small and only cover official mail and the occasional package that you send. However, if you run an e-commerce website, then shipping costs can be substantial—especially as you sell more goods.

Mike Jantomaso, co-owner of the golf polo company Lofty Llama, recently said that “when we launched our e-commerce business, we anticipated expenses like inventory, web development, and marketing—but fulfillment costs have ended up being some of the more expensive fees to date.”

Packaging, posting and shipping costs can be deducted from your taxes, as they’re part of your business operations.

Payroll

Businessman frustrated with payroll

Payroll is another category that will grow larger and increasingly complex as your business expands. While this category will remain within an expected ballpark each month, there will be adjustments that increase your costs from time to time. 

For example, you may need to budget for more funds during the peak months when you need team members to work overtime. You’ll also need to budget more when you introduce a new bonus system or if you give holiday tips to your teams. 

Payroll is a tax-deductible expense, which is why it’s so important to track it carefully—along with the need to pay your employees accurately. 

You can also assign payroll services to this category or place them in the professional services section.

Employee Benefits

Along with tracking payroll, you’ll also want to categorize the specific employee benefits that you offer. This includes the employee healthcare plan, funds you contribute to staff 401(k) retirement accounts, and perks like company gym memberships or compensation for parking or public transit fees. The cost of these benefits usually remains static over time, only increasing as you add new team members, change up plans, or introduce new benefits

Taxes

As in life, the only guarantee with business is death and taxes. As your business grows, your tax payments will become increasingly complex. You’ll need to pay federal taxes for your team members, state and local taxes, and business operations taxes to stay open. These tax rates vary by state, which can further complicate things if you open a new location in a different region. 

You may have multiple subcategories to record your taxes, along with notes within your budgeting tools to record how frequently taxes are paid and why there’s an increase—or decrease—in tax rates that were unplanned for. 

Insurance

There will be a variety of insurance costs related to your business, including workers’ compensation, professional liability insurance, property insurance, vehicle insurance, and even cybersecurity insurance.  

These costs should remain static from month to month once you reach an agreement with your insurance providers. 

Education 

Continuing education is a tax-deductible expenseand also an important category for your bookkeeping. This section can include costs like conference ticketsif you are planning to go as an attendee instead of a presentercertification costs, online courses, webinar fees, and other educational opportunities. It can also include employee onboarding and training programs, including leadership development plans, for you to invest in your staff members. 

Interest Payments

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When you receive a loan, take out a mortgage, or buy a car or equipment on credit, you’ll have to pay interest and fees on top of your existing expenses. Tracking your interest rates and projected costs separately can help you to decide whether you want to pay off your investments faster in order to potentially save money.   

There are also tax benefits to keeping this category separate from your other expenses. You can deduct interest payments on your taxes alongside your other costs, helping you to save money when you file.  

Charitable Contributions 

Charitable contributions are tax-deductible and can live in a category of their own, even if they’d likely fall under the marketing expenses related to your business. A charitable contribution can include direct cash donations to nonprofits, sponsorships for fundraisers and other events, or in-kind donations and contributions. 

For example, you could create a gift basket of your products for a silent auction and categorize the expense as a charitable contribution. You could also close your office for a company-wide employee volunteer day and count the payroll for that day as charitable giving. There are a variety of ways to support your community regardless of your business size.  

Licensing and Permits

Whether you’re opening a brick-and-mortar location or a digital business, you may need to acquire professional licensing fees or local permits to stay in operation. Many of these licenses or certificates have annual costs to stay valid, even if they’re just filing fees with the local governing body. 

The cost of licensing and permits can get expensive if you operate a business where employees need licensing and you cover the cost of their training and testing. For example, a real estate company might cover the cost of licensing to new hires as a way to grow their team. If this is the case for your business, then the licensing category will remain active throughout the year. 

Trademark and Business Application Fees 

Another category that your business might create includes application fees for your corporation or LLC and trademark costs to protect your brand and your products. While business application fees are typically annual costs, trademark application fees can be more frequent, especially if you grow your brand and add new products and services. These fees can also cover the filing costs for patents if your business invents new products for your customers to use. 

According to the United States Patent and Trademark Office, the initial application fee for registered trademarks is $225, with additional Declaration of Use fees every 5 years. 

Start Categorizing With Lendio

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Bookkeeping tools and services are meant to help small business owners keep information organized and detailed—and out of their heads. As an entrepreneur, you have enough issues to worry about and tasks to rememberyou shouldn’t have to store mental notes about every expense you accrue. 

Check out the free self-service bookkeeping tools by Lendio. You can import expenses, categorize them, and set up auto-categorization for future expenses. This way, all of your business costs are in 1 place and organized without consuming your time and energy.

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Derek Miller

Derek Miller is the CMO of Smack Apparel, the content guru at Great.com, the co-founder of Lofty Llama, and a marketing consultant for small businesses. He specializes in entrepreneurship, small business, and digital marketing, and his work has been featured in sites like Entrepreneur, GoDaddy, Score.org, and StartupCamp.