What is business expense categorization?

Business expense categorization involves systematically classifying and organizing a company's expenditures into defined categories. 

This structured approach serves multiple purposes, from simplifying tax return preparation to enabling more informed budgeting decisions.

By implementing a robust expense categorization system, businesses can gain valuable insights into their spending patterns. 

This allows for more accurate financial analysis and forecasting. Common expense categories might include operational costs, utilities, payroll, and marketing expenses.

40 business expense categories

Now that you know what business expense categories are, here’s a list of IRS business expense categories as of September 10, 2024 to help you get a better understanding:

1. Bank fees

Bank fees are charges imposed by financial institutions for various services and account maintenance. These costs are an inevitable part of doing business and can add up quickly if not monitored.

Examples: Monthly account maintenance fees, wire transfer charges, ATM withdrawal fees, overdraft fees, business credit card processing fees

Business types: All businesses with bank accounts, particularly those with high transaction volumes or international operations

2. Business use of vehicles

This category covers business-related vehicle expenses. Businesses need to distinguish between personal and business use to accurately claim deductions.

Examples: Mileage for client visits, fuel costs, vehicle maintenance, car insurance, and parking fees.

Business types: Sales representatives, real estate agents, delivery services, mobile businesses.

3. Charitable contributions

Charitable contributions are donations made by businesses to qualified nonprofit organizations. 

Examples: Cash donations, in-kind donations of products or services, sponsorship of charitable events.

Business types: Any business engaged in corporate social responsibility initiatives, particularly larger corporations.

4. Collection fees

Collection fees are expenses incurred when attempting to recover overdue payments from customers. These can be significant for businesses dealing with credit sales or services.

Examples: Fees paid to collection agencies, legal fees for debt collection, credit report fees. 

Business types: Businesses offering credit terms, service providers, B2B companies.

5. Continuing education

Continuing education expenses are costs associated with improving the knowledge and skills of business owners or employees. This investment can lead to improved performance and innovation.

Examples: Professional development courses, industry conferences, workshops, certifications, educational books and materials

Business types: Professional services firms, technology companies, healthcare providers, any business prioritizing employee development.

6. Contract labor

Contract labor expenses are payments made to independent contractors for services provided to the business. This can be a flexible alternative to hiring full-time employees.

Examples: Self-employed freelancers, graphic designers, consultants, and temporary workers.

Business types: Startups, creative agencies, seasonal businesses, and project-based companies.

7. Depreciation

Depreciation is an accounting method of allocating the cost of a tangible business asset over its useful life. It represents how much of an asset's value has been used up.

Examples: Office equipment, machinery, vehicles, and buildings.

Business types: Manufacturing companies, construction firms, businesses with significant capital assets.

8. Dues and subscriptions

This category includes fees for professional memberships and subscriptions to industry-related publications or services. These expenses help businesses stay current in their field.

Examples: Professional association memberships, industry publications, and software subscriptions.

Business types: Legal firms, healthcare practices, technology companies, and any business requiring industry-specific knowledge.

9. Employee assistance programs

Employee assistance programs (EAPs) are employer-sponsored services that offer support to employees for various personal and work-related issues. They can improve employee well-being and productivity.

Examples: Counseling services, substance abuse programs, and work-life balance support.

Business types: Large corporations, companies prioritizing employee well-being, and high-stress industries.

10. Employee benefits

Employee benefits are non-wage compensations provided to employees in addition to their normal wages or salaries. They play a crucial role in attracting and retaining talent.

Examples: Health insurance, retirement plans, life insurance, paid time off, and wellness programs.

Business types: All businesses with employees, particularly larger companies competing for talent.

11. Employee meals and entertainment

This category covers expenses related to providing food and entertainment for employees, often used for team building or during business meetings.

Examples: Company lunches, holiday parties, team-building events, and meals during overtime work.

Business types: All businesses, especially those focusing on employee engagement and corporate culture.

12. Employee training

Employee training expenses are costs associated with improving the skills and knowledge of employees to enhance job performance.

Examples: Onboarding programs, skill development workshops, leadership training, and online courses.

Business types: All businesses, particularly those in rapidly evolving industries or with complex operations.

13. Employee transportation benefits

These are benefits provided to employees to assist with their commute or other work-related travel expenses.

Examples: Transit passes, parking allowances, company shuttle services, and bicycle commuting reimbursements.

Business types: Urban businesses, large corporations, and companies in areas with limited parking.

14. Equipment maintenance contracts

These are agreements to maintain and service business equipment, often including regular inspections and repairs.

Examples: Copier maintenance agreements, HVAC service contracts, and IT equipment support contracts.

Business types: Manufacturing companies, offices with significant equipment, healthcare facilities.

15. Foreign-earned income

This refers to income earned by a business from operations or sales in foreign countries.

Examples: Revenue from overseas subsidiaries, income from exports, consulting fees from foreign clients.

Business types: Multinational corporations, export businesses, and international consulting firms.

16. General and administrative (G&A) expenses

G&A expenses are the day-to-day costs of running a business that are not directly tied to production or sales.

Examples: Office supplies, utilities, rent, administrative salaries, and legal fees.

Business types: All businesses, regardless of size or industry.

17. Gifts

Business gifts are items given to clients, employees, or business associates to show appreciation or strengthen relationships.

Examples: Holiday gift baskets, recognition awards, and thank-you gifts for clients.

Business types: All businesses, especially those relying on strong client relationships.

18. Insurance

Business insurance protects companies from various risks and potential financial losses.

Examples: General liability insurance, property insurance, professional liability insurance, and cyber insurance.

Business types: All businesses, with specific needs varying by industry and size.

19. Interest

Interest expenses are costs incurred from borrowing money for business purposes.

Examples: Interest on business loans, credit card interest for business purchases, and mortgage interest on business property.

Business types: Any business using financing, especially those with significant capital needs.

20. Inventory

Inventory expenses relate to the cost of goods that a business intends to sell to customers.

Examples: Raw materials, finished products, and work-in-progress items.

Business types: Retail businesses, manufacturers, and wholesalers.

21. Legal and professional services

These are fees paid for specialized professional services necessary for business operations.

Examples: Attorney fees, accounting services, consulting fees, and tax preparation costs.

Business types: All businesses, especially those dealing with complex regulations or frequent legal matters.

22. Maintenance and repairs

These expenses are incurred to keep business property and equipment in good working condition.

Examples: Building repairs, equipment maintenance, and vehicle servicing.

Business types: All businesses with physical assets, especially manufacturing and property management companies.

23. Marketing and advertising

These are costs associated with promoting a business's products or services to potential customers.

Examples: Social media ads, billboard ads, print advertisements, sponsorships, and marketing agency fees.

Business types: All businesses, especially those in competitive markets or launching new products.

24. Moving expenses

These are costs incurred when a business relocates its operations.

Examples: Packing and transportation costs, lease termination fees, and setup costs at a new location.

Business types: Growing businesses, companies consolidating operations, and businesses seeking lower-cost locations.

25. Pension contributions

These are payments made by a business into employee retirement plans.

Examples: 401(k) matching contributions, defined benefit plan contributions, and SIMPLE IRA contributions.

Business types: Medium to large businesses, companies competing for skilled employees.

26. Printing

Printing expenses cover costs associated with producing physical copies of documents, marketing materials, and other business-related items. 

This can range from in-house printing to outsourced professional printing services.

Examples: Ink cartridges, paper, printers, outsourced printing services for business cards, brochures, and direct mail campaigns.

Business types: Businesses of all sizes, especially those in marketing, publishing, or with significant documentation needs.

27. Rent and leases

This category includes payments made for the use of property or equipment that the business doesn't own outright. It's a significant expense for many companies that don't own their operational spaces.

Examples: Office space rent, warehouse leases, equipment rentals, and vehicle leases.

Business types: Any business that doesn't own its premises or needs to lease equipment, from startups to large corporations.

28. Research and development (R&D)

R&D expenses are costs incurred in the process of creating new products, services, or processes, or improving existing ones. 

These investments are crucial for innovation and maintaining competitiveness.

Examples: Laboratory equipment, prototype development, testing materials, and research workers’ compensation.

Business types: Technology companies, pharmaceutical firms, manufacturing businesses, and any company focused on innovation.

29. Safety equipment

Safety equipment expenses cover items necessary to protect employees and ensure a safe working environment. This is critical for compliance with workplace safety regulations.

Examples: Hard hats, safety goggles, first aid kits, fire extinguishers, ergonomic office equipment.

Business types: Construction companies, manufacturing firms, laboratories, and any business with potential workplace hazards.

30. Salaries and wages 

This category encompasses all compensation paid to employees, including regular pay, overtime, bonuses, and commissions. It's often one of the largest expense categories for businesses.

Examples: Regular employee salaries, hourly wages, performance bonuses, and sales commissions.

Business types: All businesses with employees, from small startups to large corporations.

31. Security

Security expenses cover costs related to protecting a business's physical and digital assets, as well as ensuring the safety of employees and customers.

Examples: Security system installation and monitoring, security guard services, and cybersecurity software.

Business types: Retail stores, banks, office-based businesses, and any company with valuable physical or digital assets.

32. Shipping and postage

This category includes costs associated with sending or receiving goods and correspondence. It's particularly significant for ecommerce and businesses with frequent mailing needs.

Examples: Postage for business mail, courier services, freight charges for inventory or product shipments.

Business types: Ecommerce businesses, retailers with shipping services, companies with frequent mailing needs.

33. Software

Software expenses cover costs for computer programs and applications used in business operations. This can include both one-time purchases and ongoing subscription fees.

Examples: Accounting software, customer relationship management (CRM) systems, productivity tools, and industry-specific applications.

Business types: Nearly all modern businesses, especially those relying heavily on technology.

34. Startup expenses

Startup expenses are costs incurred when starting a new business before it begins generating revenue. These can include a wide range of initial investments necessary to get the business operational.

Examples: Incorporation fees, initial marketing costs, first month's rent, and initial inventory purchases.

Business types: New businesses across all industries.

35. Taxes and licenses

This category includes various taxes and fees paid to operate a business legally. It's crucial for maintaining compliance with local, state, and federal regulations.

Examples: Business licenses, professional certifications, property taxes, and sales taxes.

Business types: All businesses, though specific requirements vary by industry and location.

36. Telecommunications

Telecommunications expenses cover costs related to business communication, including phone and internet services. These are essential for most modern businesses.

Examples: Business phone lines, mobile phone plans, internet service, and VoIP systems.

Business types: All businesses that rely on phone and internet communication.

37. Travel

Travel expenses include costs incurred while traveling for business purposes. This can encompass a wide range of expenses related to business trips.

Examples: Airfare, hotel accommodations, rental cars, and business meals during business trips.

Business types: Businesses with traveling sales teams, consulting firms, and companies attending trade shows.

38. Tuition reimbursement benefits

This category covers expenses related to employer-provided educational assistance for employees. It's a valuable benefit that can help attract and retain talent.

Examples: Reimbursement for college courses, professional certification programs, industry-specific training.

Business types: Large corporations, knowledge-based industries, and companies focused on employee development.

39. Utilities

Utility expenses cover costs for essential services needed to operate a business location. These are ongoing operational costs for most businesses with physical premises.

Examples: Electricity, water, gas, sewage, and trash collection.

Business types: Any business with a physical location, including offices, retail stores, and manufacturing facilities.

40. Work opportunity tax credit (WOTC)

The WOTC is a federal tax credit typically available to employers who hire individuals from certain target groups that have faced significant barriers to employment. Consult with a tax professional to see if you qualify.

Examples: Hiring veterans, long-term unemployment recipients, and ex-felons.

Business types: Any business that hires eligible employees from specified target groups.

How to categorize business expenses

Consistently categorizing business expenses helps you identify areas of overspending, optimize resource allocation, and make data-driven decisions to improve overall financial performance. 

Here's how you can do it effectively:

• Establish tailored expense categories: Consider your industry-specific needs and the nature of your regular expenditures. 

For instance, a retail business might need categories for inventory and shipping, while a consulting firm might focus on travel and professional development.

• Implement a consistent coding system: This involves assigning specific numbers or labels to each category. 

Consistency is the key here – you need to ensure that all team members responsible for expense management understand and apply this system uniformly.

• Document thoroughly: Ensure that each expense entry includes relevant details such as date, amount, purpose, and any required receipts.
• Separate personal and business expenses: This separation is not only essential for accurate financial reporting but also crucial for legal and tax compliance.
• Regularly review and reconcile accounts: Set aside time each month to review your categorized expenses and reconcile them with your bank statements. 

This practice helps catch any miscategorizations early and ensures your financial records remain accurate.

What is a tax-deductible business expense?

Tax-deductible business expenses are costs you incur while operating your business that can be subtracted from your taxable income, effectively reducing your tax liability. 

The key is that these expenses should be both ordinary and necessary for your business operations. This means they should be common in your industry and essential for running your business effectively.

Moreover, to maximize your deductions while staying compliant with tax laws, it's essential to keep meticulous records of all your business finances. Make sure to also consult with a tax professional.

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Use expense management software to manage business expense categories

Apart from these tips, you can further streamline your business expense categorization by investing in expense management software. 

These solutions help you manage your expenses by offering features such as:

• Customizable expense categories: With these solutions, you get to set up spending rules that can be finely tuned by dollar amount, budget, and even specific merchants. 

This enables precise accounting categories for expenses to match unique organizational needs.

• Real-time expense capture: The system prompts employees to add receipts and relevant data in real-time, ensuring accurate and timely categorization of expenses as they occur, reducing the backlog, and improving financial visibility.
• Multi-level approvals: The platform offers customizable approval workflows, allowing for a hierarchical review of expenses based on categories or amounts.
• Automated policy enforcement: The system's automated enforcement of company expense policies ensures consistent adherence to preset expense categories and limits. 

This automation reduces the need for manual oversight and maintains expense policy compliance.

• Intelligent expense review: These systems also intelligently flag transactions that need attention or approval. 

This allows managers to focus their efforts on unexpected or out-of-category expenses, saving time by reducing the need for manual review of routine transactions.

Conclusion: Manage expenses more seamlessly with Rho

Understanding and properly categorizing your business expenses is crucial for financial management, tax compliance, and strategic decision-making. 

However, remember that while this small business expense categories list covers a wide range of common business expenses, every business is unique. 

Your specific industry, size, and operational structure may lead to additional or specialized expense categories.

To streamline this, consider Rho’s expense management software that combines customizable spending rules, real-time mobile receipt capture, and automated policy enforcement to ensure accurate expense categorization and compliance.

The platform also offers multi-level approvals and intelligent transaction flagging among other features that adapts to the evolving needs of growing businesses while maintaining tight control over spending categories and budgets.

Schedule a demo today!

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Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.

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