25 essential business expense categories and how to organize them

Business expenses aren’t just costs—they’re data points. They can reveal information about your business, helping you make strategic decisions, drive growth, and streamline your operations. More importantly, business expenses need to be tracked and recorded—if they aren’t, tax season can quickly turn into a daunting ordeal.

Whether you're a small business owner juggling multiple roles or a finance manager in a larger enterprise looking for ways to optimize, you need to master business expense categories. In this article, we’ll explore 25 ways you can categorize your business expenses—plus actionable strategies and rules you need to know to turn your financial tracking into a powerful tool for success.

What are business expense categories?

Business expense categories are systematic groupings of the costs incurred during the operation of a company. The categories serve as a framework for organizing expenses, making it easier to track where money is spent and to analyze financial performance. By grouping similar expenses together—such as office supplies, marketing costs, or employee salaries—businesses can gain clearer insights into their spending habits and make informed decisions about budgeting and resource allocation.

Expense categories are important for more than just financial management. For example, you can use them to generate reports, which can inform strategic planning and investment decisions. Well-organized expense categories also simplify the tax preparation process. When expenses are properly categorized, it's easier to identify which costs are tax-deductible, which makes it much easier to comply with the law and maximize your business tax deductions.

What are deductible business expenses? 

Deductible business expenses are costs that the Internal Revenue Service (IRS) allows businesses to subtract from their total taxable income, which can result in significant tax savings. Knowing which expenses are tax deductible can help business owners and financial managers reduce their net income and tax liability.

To qualify as tax deductible, an expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry or type of business. A necessary expense is one that is helpful and appropriate for your business operations. Examples of tax deductible expenses include rent or mortgage interest on business property, employee wages, utilities, and certain types of insurance premiums.

It's important to note that not all business expenses are fully tax deductible, and some may have limitations or specific conditions. For example, only 50% of meal and entertainment expenses may be deductible under certain circumstances. It can help to consult with a tax professional to make sure you’re fully on top of current regulations and maximizing your business tax deductions.

25 business expense categories 

Wondering how to categorize expenses? The following 25 types of business expense categories cover a wide range of costs that businesses of all sizes should consider:

1. Bank fees

Charges incurred from banking activities, including account maintenance, wire transfers, and overdraft fees.

Example: Monthly service charges for a business checking account

2. Mortgage costs

Expenses related to the mortgage of business property, such as interest payments and closing costs.

Example: Interest paid on a mortgage for the company's office building

3. Office supplies

Everyday items used in the operation of a business.

Example: Purchasing printer paper, pens, and notebooks for staff use

4. Marketing 

Costs associated with promoting the business's products or services.

Example: Expenses for running a social media advertising campaign

5. Business meals 

Expenses for meals with clients, partners, or employees during which business is conducted.

Example: Paying for dinner during a meeting with a potential client to discuss a proposal

6. Company car usage 

Costs related to using and maintaining vehicles owned or leased by the business.

Example: Fuel and maintenance expenses for a delivery van

7. Client gifts 

Expenses for gifts given to clients or customers as a gesture of appreciation or goodwill.

Example: Sending branded gift baskets to loyal customers during the holidays

8. Dues and subscriptions

Fees for professional memberships, associations, or subscription services relevant to the business.

Example: Annual membership dues for a trade association or subscriptions to industry journals

9. Employee benefit programs 

Costs of benefits provided to employees beyond their regular wages.

Example: Company contributions to employee health insurance premiums or retirement plans

10. Insurance

Premiums paid for policies that protect the business from various risks.

Example: Payments for general liability insurance or property insurance

11. Legal expenses 

Fees paid for legal services necessary for business operations.

Example: Attorney fees for drafting contracts or handling a lawsuit

12. Employee salaries 

Wages and salaries paid to employees, including bonuses and commissions.

Example: Monthly payroll expenses for staff members

13. Depreciation

The allocation of the cost of tangible assets over their useful lives.

Example: Annual depreciation expense for office equipment like computers and furniture

14. Employee loans

Funds lent to employees, often with the expectation of repayment.

Example: Providing an advance on salary to an employee for emergency expenses

15. Foreign earned income

Income earned from business activities conducted outside the home country.

Example: Revenue from consulting services provided to an international client

16. Licenses and permits

Fees paid to obtain or renew legal permissions required for business operations.

Example: Cost of renewing a food service license for a restaurant

17. Raw materials 

Costs of basic materials used in the production of goods.

Example: Purchasing steel for a manufacturing company producing automotive parts

18. Shipping 

Expenses incurred when sending products to customers or receiving supplies.

Example: Paying courier services for delivering online orders to customers

19. Utilities

Ongoing expenses for essential services required to run the business premises.

Example: Monthly payments for electricity, water, and internet services

20. Business travel

Costs associated with travel for business purposes, including transportation and lodging.

Example: Airfare and hotel expenses for attending an industry conference

21. Software 

Expenses for purchasing or subscribing to software tools necessary for operations.

Example: Subscription fees for project management software like Asana or Trello

22. Employee training  

Costs of programs and resources to improve employee skills and productivity.

Example: Fees for a workshop on advanced sales techniques for the sales team

23. Continuing education

Expenses for courses or programs that enhance professional knowledge relevant to the business.

Example: Tuition for an accountant taking advanced courses in tax law

24. Maintenance and repairs 

Costs for the upkeep and fixing business property and equipment.

Example: Repairing a broken piece of machinery on a production line

25. Charitable contributions

Donations made to qualified charitable organizations, which may also offer tax benefits.

Example: Donating funds to a local nonprofit organization or sponsoring a community event

How to categorize and track business expenses: 5 best practices

Categorizing and tracking business expenses can help with both financial reporting and optimizing business tax deductions. Here are five best practices to help you manage your expenses efficiently:

1. Consider your business structure and industry

Your business's legal structure (sole proprietorship, partnership, corporation, etc.) and the industry you operate in influence how you should categorize expenses. Different industries have unique costs, and certain expenses may be more prevalent or fall under special rules depending on your sector.

Tailor your expense categories to reflect your specific business needs and the common business expenses you often encounter. For example, a tech company might include "Software Development Costs," while a retail store might have "Inventory Purchases."

2. Rely on digital tools for automation

Accounting software and digital tools can automate the categorization and tracking process, which can reduce errors and save time. These tools often integrate with bank accounts and credit cards, providing real-time expense tracking.

Rippling offers AI-powered transaction categorization that syncs to your general ledger and integrates with your accounting systems so you can close the books faster.

3. Review financial accounts regularly 

Regular reviews of your financial accounts will help you stay on top of your expenses, identify discrepancies, and adjust your budgets as needed. Taking a proactive approach helps ensure that your financial data is current and accurate.

Set aside time each month to reconcile bank statements, review expense reports, and assess your financial health.

4. Assign a category for every transaction

Consistently assigning a category to every transaction prevents misclassification or expenses from slipping through the cracks. This makes for more accurate financial statements and simpler tax preparation when the time comes.

Create a comprehensive list of expense categories and train all your financial personnel to use them consistently.

5. Centralize expenses using a single business credit card account

Using a dedicated business credit card for all expenses centralizes your spending, making it easier to track and manage. It also separates personal and business expenses, which is a best practice for legal and tax purposes.

Opt for a card that offers benefits relevant to your business, such as cashback on office supplies or travel rewards, and use it exclusively for business transactions.

What other business expenses are tax deductible?

Knowing what business expenses are tax deductible can help your business maximize savings at tax time. In addition to the common expense categories, there are other business tax deductions your organization might qualify for. Here are some additional tax deductible business expenses to consider:

• Work Opportunity Tax Credit (WOTC): A federal tax credit available to employers who hire individuals from certain target groups, like veterans, ex-felons, or individuals receiving government assistance, that have consistently faced significant employment barriers
• New Markets Tax Credit: A credit that encourages investment in low-income communities by providing tax incentives to investors in Community Development Entities 
• Intellectual property protection: Costs associated with securing patents, trademarks, or copyrights to protect your business's intellectual property
• Environmental cleanup costs: Expenses incurred from cleaning up environmental contamination, such as the removal of hazardous materials from a business site, can be tax deductible under certain conditions

Non-deductible expenses

Being aware of what isn’t tax deductible can help you stay compliant and avoid issues during tax filing. Here are some common non-deductible expenses for your business:

Personal expenses

Any costs that are personal in nature and not directly related to the operation of the business cannot be deducted. Mixing personal expenses with business finances can lead to complications and potential penalties during audits.

Example: Using company funds to pay for personal groceries, clothing, or family vacations

Client entertainment

Expenses for entertainment activities provided to clients, such as sporting events, concerts, or recreational outings, are generally not tax deductible. The IRS doesn’t allow business tax deductions for entertainment to prevent abuse of this category.

Example: Purchasing tickets to a baseball game or paying for a round of golf for a client

Political contributions

Donations made to political parties, candidates, or political action committees are not deductible as business expenses. This rule exists so that businesses cannot reduce their taxable income through political influence.

Example: Contributing funds to a political campaign or sponsoring a political event

Fines and penalties

Payments for fines or penalties resulting from violations of laws or regulations are not tax deductible. The IRS does not allow business tax deductions for expenses that result from illegal activities or non-compliance.

Example: Paying a fine for violating environmental regulations or incurring penalties for late tax payments

Automate expense management with Rippling

Rippling consolidates all of your company’s finances—from payroll and benefits to corporate cards and expense management–giving you an up-to-date view of cash flow across your company and offering unprecedented control over spending patterns.  

While most expense management solutions only allow for basic employee-manager approval chains, with Rippling expense management’s advanced policy engine, you can set hyper-custom policies based on the vendor, dollar amount, and expense category, helping you block out-of-policy expenses with ease. You can also tee up automated workflows that help you control spend, like triggering an alert when a department’s expenses sharply increase. 

With Rippling you can: 

• Automatically route expenses and bills to the right approver every time. 
• Flag out-of-policy spending with hyper-custom policies, like by vendor or value, for further review. 
• Close the books faster with AI-powered transaction categorization, and integration with your accounting systems.

Business expense categories FAQs 

Why are business expense categories important? 

Business expense categories are essential for many reasons. Here are a few of the key ones:

• They help keep your financial records organized, making it easier to track where money is spent.
• Categorizing expenses correctly is vital for tax purposes, so you can claim all eligible business tax deductions and remain compliant with tax laws, reducing the risk of audits and penalties.
• Understanding your spending patterns allows you to make better budgeting and strategic decisions to improve profitability.

What are the IRS’ business expense categories?

The IRS does not provide a rigid list of business expense categories for taxes, but emphasizes that deductible expenses must be both ordinary (common in your trade or business) and necessary (helpful and appropriate). Common types of expenses recognized by the IRS include:

• Advertising and marketing
• Vehicle expenses
• Employee wages and benefits
• Rent or mortgage interest
• Utilities
• Office supplies
• Legal and professional services
• Travel expenses
• Health insurance premiums

Businesses should categorize expenses in a way that meets IRS guidelines, accurately reflects, spending, and aligns with company needs.

What is the expense category for business cards?

Business cards fall under the “advertising and marketing expenses” category. This category includes costs associated with promoting your business's products or services. Since business cards are a tool for networking and marketing, their costs are considered advertising expenses and are generally considered a tax deductible business expense.

How do I make sure my expense categories are correct?

To make sure you categorize your business expenses correctly, you can:

• Work with an accountant or tax advisor familiar with your industry
• Leverage accounting tools that offer standardized categories and can automate the tracking process
• Review IRS guidelines and updates to understand which expenses you can deduct and how they should be categorized
• Apply categories consistently across all transactions to maintain clear and organized records
• Keep detailed records and receipts for all expenses, noting the date, amount, and business purpose for each transaction

Can personal expenses ever be deducted as business expenses?

Generally, personal expenses are not deductible as business expenses. However, if an expense serves both personal and business purposes, you may be able to deduct the portion attributable to business use. For example, if you use your personal vehicle for business travel, you can deduct the business-related mileage. It's important to keep meticulous records and consult a tax professional to help determine how much you can deduct.

This blog is based on information available to Rippling as of September 26, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.