Business Expense Categories: A Guide for Managers

Running a business costs money, and the IRS allows you to deduct certain business expenses, giving you an opportunity to recover some of that money during tax season. To deduct these expenses, you need to keep thorough logs of all eligible business transactions throughout the year. Continue reading to learn more about business expenses and which categories are relevant for your business.

 

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What are business expenses?

Business expenses are any costs associated with starting and running your business. The expenses associated with a business can vary depending on the industry and type of products or services you offer. These expenses impact whether your business experiences a net profit or loss, and are either fixed, meaning they maintain the same cost over time, or variable, which refers to costs that are subject to change.

 

As a business, you can report and deduct certain expenses when filing your taxes. According to the IRS, deductible business-related expenses must be:

 

  • Ordinary and necessary: Ordinary expenses are common costs of doing business in your industry or trade, while necessary expenses are quantified as costs that help your business.
  • Incurred from a business or trade: Your business or trade has to be profit-motivated, meaning you must plan and be able to make a profit for you to be allowed to deduct your expenses. Otherwise, the IRS considers the endeavor a hobby and disallows expenses.

Related: What Is Expense Reimbursement? A Guide for HR Professionals

 

Common types of tax-deductible business expenses

There are innumerable deductible expense categories based on the wide range of different industries that exist. Here are some of the more common tax-deductible business expense categories:

 

Payroll

You can deduct any kind of compensation given to your employees, including commission bonuses, salaries or gross wages. Additionally, you can deduct any wages that you pay your children or spouse as long as the pay is fair, they worked for the compensation and you made the payments through payroll.

 

Employee benefits

If you make payments on behalf of your employees to cover things like life insurance, group insurance, dependent care assistance, cafeteria plans, child care, adoption assistance, sick days, paid vacation, retirement benefits or fitness plans, you can deduct the costs from your taxes.

 

Employee education reimbursement

Payments made toward the continued education of you or your employees are tax-deductible as long as it pertains to your business or trade. This can include the cost of:

  • Registration
  • Materials
  • Courses

Advertising and marketing expenses

Any costs associated with promoting your business are deductible, including expenses related to:

  • Promotional email subscriptions
  • Websites
  • Flyers
  • Business cards
  • Running a commercial on the radio or television
  • Placing an ad in a newspaper, billboard or digital magazine

Aside from the more traditional advertising strategies, you can also deduct sponsored content, paid searches, social media ads and video ads. Additionally, you can account for the production costs involved in the endeavors in this category.

 

Business startup costs

There are generally at least some costs incurred to get your business in operational order. You can deduct as much as $5,000 in organizational costs and $5,000 in startup costs within your first year of business.

 

Business vehicles

Some businesses necessitate that you have a company vehicle, but even if you’re using your personal vehicle for business, you can deduct a portion of your its expenses. Costs that are tax-deductible include:

 

  • Tolls
  • Parking fees
  • Car washes
  • Repairs
  • Gas
  • Mileage
  • Garage rent
  • Insurance
  • Taxes and registration fees
  • Tire replacements
  • Oil changes

Business materials and office supplies

You can deduct any supplies that you use in your business, such as:

 

  • Books and manuals
  • Cleaning supplies
  • Notepads, pens and pencils
  • Printer ink
  • Toner
  • Paper
  • File folders

Rent and leases

Any payments you make to lease a vehicle or rent equipment, office space or a warehouse to store supplies and inventory are tax-deductible.

 

Utilities

You can deduct any bills associated with running your office space, including gas and electricity expenses. 

 

Telephone

Whether you have a whole phone system or you supply cell phones for your employees, the cost is completely deductible.

 

Travel expenses

If you or your employees travel for business, regardless if it’s international, national or just local, their lodging, meals and transportation are all tax-deductible.

 

Meals and entertainment

You can deduct events and meals as long as they are business-related. This can include holiday parties, taking a big client to a game or treating your staff to a fun outing.

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