Small Business Tax Preparation Guide

3. A Beginner’s Guide to Business Expense Categories

Next Read: Form 1099: How To Prepare And File With The IRS


A Beginner’s Guide to Business Expense Categories

Jan 11, 2023 • 10+ min read
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      As your business grows, so too will your expenses. These expenses will range from minor travel costs—filling up a rental car tank, for example—to 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 easier—they can also streamline business tax filing. When your expenses are organized, you’ll be able to cruise through your tax reporting and be in a better position to get deductions. 

      Also known as write-offs, tax deductions are expenses that can be deducted from your overall tax bill. Subtracting the qualified expense from the taxable income you’re reporting leads to a correspondingly lower amount you will owe.

      This guide will go over the benefits of keeping clear business categories and discuss which categories you might want to consider using. 

      Common Small Business Budget Expense Categories

      The IRS is understandably interested in what expenses you plan to deduct. For this reason, the agency lays out robust guidelines.

      “To be deductible, a business expense must be both ordinary and necessary,” explains the IRS in a general statement on their website. “An ordinary expense is one that is common and accepted in your trade or business. 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.”

      Here are some common expense categories that most businesses will deal with at some point.

      Advertising and Marketing

      Spreading the word about your business can be costly, but those expenses are usually deductible. If you’re investing in something like email marketing, billboards, display ads, or a Super Bowl ad, track your expenses and report them in your tax filing. There are some exceptions to this rule. For example, if your promotional expenses are related to political efforts, they probably can’t be deducted.

      Examples of qualified expenses include:

      • Business website design
      • Business logo creation
      • Printing new business cards
      • Printing informational brochures
      • Paying for online display ads
      • Mailing marketing materials to customers
      • Social media ads

      Bank Fees

      You can often deduct your expenses related to overdraft fees, transfer fees, merchant fees, or ongoing services charges. You should always have a dedicated business account, as any fees related to your personal account should not be deducted.

      Business Meals

      Yes, meals can be deducted in many business situations. Just note that the food can’t be lavish (sorry, lobster lovers)—it needs to be necessary to the ordinary course of your business, and the owner or an employee needs to be present.

      Documentation is essential for these deductions. Here’s a pro tip: keep a receipt for every business meal, and then write the date of the purchase, the location of the purchase, and the business purpose on the back.


      Continuing education is a tax-deductible expense—and also an important category for your bookkeeping. This section can include costs like conference tickets—if you are planning to go as an attendee instead of a presenter—certification 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. So if you complete a development course or some other form of professional education that enhances your abilities within your industry, you can deduct the related costs.


      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.

      It can cost a lot of money to insure your small business. Luckily, those costs can be deductible. Here are some examples of qualified expenses:

      • Auto insurance for your fleet vehicles
      • Liability insurance
      • Business interruption insurance 
      • Property insurance for your structures or equipment
      • Health, dental, and vision insurance for your employees
      • Workers compensation

      Interest Payments

      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.  

      It often takes a village to run a small business. 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. The services of accountants, tax preparers, attorneys, and other professionals are valuable, but they don’t come cheap. Luckily, they’re tax deductible.

      As with other expenses, the situation is approached differently if some of the costs were for the personal side of your life. You’ll need to partner with an expert to ensure you handle it correctly.

      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.

      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 can—and should—be 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. 

      Furniture and Office Supplies

      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.

      Office supplies: Regardless of where your office is, you can deduct expenses related to supplying your office. This category could include anything from computers to chairs to fish tanks.

      Business Permits, Taxes, and Licenses

      Much of the money you spend to start your business and keep it running can be deducted. Examples of qualified expenses include:

      • Business license
      • Permits
      • Payroll taxes
      • Sales tax
      • Personal property taxes
      • State income taxes
      • Fuel 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.

      Business Travel Expenses

      Running a business often requires you to get from point A to point B. Those travel expenses can be deductible, but the IRS has obviously added stipulations to make sure that it’s all legitimate. You can’t just take a jaunt with your buddies to Vegas and then claim it was all for business.

      In order for your travel expenses to qualify for deductions, they must fall within the normal bounds of “ordinary” and “necessary.” They also need to have been incurred away from your tax home, which is where you conduct your business. Also, the expenses must come from a trip that was more intense than just a regular day.

      Examples of qualified expenses include:

      • Airline tickets
      • Train tickets
      • Bus tickets
      • Parking
      • Tolls
      • Hotel
      • Shipping business materials

      Of course, you’ll need to keep detailed records. Make sure to note the location of your trip, how it related to your business, and how long you were there.

      If you have a business location, you can deduct the utility costs from your taxes. It’s not as straightforward if you work from a home office, so it’ll be important to work with a tax professional to figure out the best way to handle that situation.


      If you have a business location, you can deduct the utility costs from your taxes. It’s not as straightforward if you work from a home office, so it’ll be important to work with a tax professional to figure out the best way to handle that situation.

      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. 

      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.

      You have a couple of options available for deducting your vehicle expenses. First, you can use the IRS mileage allowance as a catchall. The other approach is to deduct specific expenses. If you also use the vehicle(s) for personal use, make sure you track those expenses so they don’t bleed into your business-related reporting.

      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.

      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. 

      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. 


      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. Here are some of the requirements to make sure the expenses of compensation qualify for deductions:

      • The employee provided the services they were compensated for
      • The employee isn’t in any way an owner of the business
      • The employee’s salary meets the qualifications of “reasonable” and “necessary”

      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.

      Remember, different businesses will have different budget expense categories. Therefore, no business will qualify for every deduction. But that’s not the point. Your goal should be to carefully track every expense so that the tax experience is better. Every positive action you take in January or May will pay dividends the following April as you navigate the tax reporting process quicker and come away with a lighter bill.

      About the author
      Derek Miller

      Derek Miller is the CMO of Smack Apparel, the content guru at, 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,, and StartupCamp.

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