Essential business expense categories for startups.
Each time you order new office supplies, pay rent for your business, or purchase an ad, you’re covering a business expense. Broadly speaking, business expenses are the costs that your startup incurs to generate sales.
By organizing these diverse costs into distinct business expense categories, you can effectively create budgets, correctly file taxes, and maintain accurate books.
You'll also be able to claim the tax savings available for your company. Many business expenses are tax-deductible, returning vital funds to startup owners when tax time rolls around. Using clear business expense categories helps you identify opportunities to save, and much more.
In this article, you'll find a list of the most common business expense categories for startups. Also, we'll go over what makes an expense tax-deductible, how to track expenses, and how to set up custom categories.
A quick overview of tax-deductible business expenses.
From printer paper to payroll taxes, the type of business expenses you'll incur will vary. But to write off an expenditure on your income tax return, it has to meet specific IRS requirements.
Per the IRS, business expenses are tax-deductible if they are "ordinary and necessary." IRS Publication 535 provides greater detail:
"An ordinary expense is one that is common and accepted in your industry. 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."
As a startup founder, you've already encountered a few common business expenses. This might include travel costs, consulting fees, internet bills, state taxes, and employee wages. Some of these costs are fully deductible. Others must be calculated using specific formulas or percentages.
List of business expense categories for startups.
Many startup owners align their business expense categories with the small business tax deductions they plan to claim. The IRS describes some of the standard expense categories in Publication 535. What matters most is that your categories make sense to you or your accountant.
Every industry has a different set of commonly used business expense categories. Depending on the accounting tool you use, there may already be expense categories set up for you. We’ve compiled the categories that startup founders are most likely to use.
Rent or mortgage payments.
If you rent or own office space or another business location, record this in a separate category. The interest on your rent or mortgage payments is likely deductible.
Home office costs.
Businesses based in a home office qualify for deductions, too. Using the home office deduction, you can write off costs like rent, paint, repairs, utilities, and mortgage interest. There are strict rules around what qualifies as a home office, so make sure you meet the requirements.
Include the monthly costs of electricity, gas, water, air conditioning, and trash. If you rent or lease your business location, utility costs may be built into the rent. Remember to include the costs of cellphones and internet access as well.
Furniture, equipment, and machinery.
Generally, a business purchase that will last longer than a year is considered a business asset rather than an expense. This includes items like desks, laptops, machinery, and point-of-sale systems.
Deductions for assets are treated differently. You must either deduct the asset’s entire cost in the first year you bought it or deduct the cost of depreciation. Consult a tax professional to make sure your bookkeeping is handled correctly.
Office expenses are one of the most common categories. Track your spending on pens, folders, disinfectant wipes, trash bags, and other cleaning supplies, so no purchases slip through the cracks.
Advertising and marketing.
These are the costs of promoting your brand. You might include pay-per-click ads, billboard placements, giveaways, and even business cards. If you pay a graphic designer for a website image, you could include that here, or file it under professional fees.
Website and software expenses.
Include fees for your domain name, web hosting, maintenance, and more. Don't forget to capture your software as a service (SaaS) spending. Website builders like Squarespace and accounting software like QuickBooks are a couple of examples.
Business entertainment expenses are not tax-deductible, but you’ll still want to track entertainment spending closely. Tickets to sporting events, galas, and networking events fall into this category.
Business meals and travel expenses.
The IRS watches these categories closely. If you want to deduct meal and travel expenses, you need to keep accurate records and receipts. Note that business travel constitutes travel outside city limits, including vehicle costs, airfare, accommodations, and meals.
Track gas, oil, insurance, and repair and maintenance spending. There are two options to write off the costs of using your vehicle for business. You can use the standard mileage rate option or the actual expense option. As we mentioned earlier, you may want to consult a tax professional for more detail. If you buy a vehicle and want to deduct depreciation costs, the vehicle must be driven for business purposes at least 50% of the time.
This might include the wages, bonuses, or commission that you pay workers, whether they're full-time employees or contractors. Place payroll taxes in a separate category for added financial clarity.
If you offer health insurance, list any insurance premiums you cover. Contributions toward retirement plans like 401(k) plans or other funds should be recorded. As a business owner, you might have self-employed insurance costs, too.
Tracking taxes separately helps you correctly allocate money that’s due. Record business property taxes, small business taxes, and federal, state, and local payroll taxes, especially Social Security and Medicare tax.
Payments toward business liability insurance, disability insurance, workers’ compensation insurance, and more should be recorded.
Business licenses and permits.
Include the costs of occupational licenses, health permits, and other required certifications for your industry.
Interest payments and bank fees.
You'll pay interest on any borrowed funds or ongoing credit lines, like a corporate credit card. If you run into bank fees, like minimum balance fees or overdraft fees, record those, too.
If you’re part of a trade association or local chamber of commerce, use this category to monitor and write off your dues. Keep in mind that you can't deduct fees for social clubs.
Professional fees and business services.
Record how much you pay for professional services. When you work with a marketing agency, legal advisor, certified public accountant (CPA) or tax advisor, use this category.
Training and education.
Business owners are entitled to tax deductions to keep all team members skilled and up to date on the latest industry practices. Document and write off employee training costs, conferences, workshops, and other development opportunities.
Setting up business expense categories.
Without a solid expense tracking and accounting system, the potential for missed tax deductions and overspending is high. These missteps lead to cash flow issues, one of the most common causes of a business closure. Fortunately, clear business expense categories help you avoid this.
You can track, manage, and categorize your spending a number of ways, and even use different financial tools in combination. Here are some of the most convenient options.
- Accounting software: With accounting software, you can build off the suggested industry-specific categories or easily create your own. If you connect your bank and credit accounts, all your transactions are automatically uploaded and sorted.
- A receipt app or expense tracker app: This is on-the-go expense tracking for you and your employees. Take a picture of your receipt, and the app scans and extracts the details. Transactions are instantly categorized. Use the app as a separate receipt library, or integrate it with accounting software like NetSuite or QuickBooks.
- Business or corporate credit card: Centralize your expenses using a single business credit card account, and issue cards to employees as needed. From there, you can sync your account with accounting software or a receipt app. Some cards, such as the Brex corporate card, even include a mobile app with receipt scanning features, so you don't have to download another app. This way, every expense is documented and sorted correctly.
Organized business expenses matter.
Clear-cut business expense categories and tax deductions go hand in hand. At the end of the tax year, organized expenses save businesses significant time on tax filing and improve your chances of saving money.
Furthermore, if you’re pitching to investors, applying for credit, or creating financial projections, you’ll also need an accurate estimate of your regular business expenses, all properly organized.
As you can see, effective expense management has an outsize impact on your business. Between accounting software, receipt tracking apps, and all-in-one credit accounts, there are ample tools to simplify each step. If you have questions along the way, it’s always best to ask your CPA or tax advisor.
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