How to Categorize Your Business Expenses

How to Categorize Your Business Expenses
Do you ever struggle to figure out where your business income went? Categorizing your business expenses in a trackable way allows you to see what your funds are being used for and to make better business decisions.
Apr 06, 2023 — 8 min read
How to Categorize Your Business Expenses
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench and Square assume no liability for actions taken in reliance upon the information contained herein.

Do you ever struggle to figure out where your business income went? Categorizing your business expenses in a trackable way allows you to see what your funds are being used for and to make better business decisions.

It can also help you determine what business deductions you are eligible to claim at tax time. As a small business owner, you want to claim every allowable tax deduction to lower your tax bill and maximize cash flow. Properly tracking and categorizing deductible expenses helps you keep good records for yourself or your accountant, making tax time a breeze.

If you’re not sure where to start, this article covers some common business expense categories and how to know whether an expense is deductible or not, and provides some tips for tracking them.

The business expenses list every business owner needs

Creating business expense categories helps you understand which expenses you can deduct and which you can’t. In addition, if you have a bookkeeper or tax preparer handle your taxes, categorizing your expenses using a chart of accounts saves time and money on income tax preparation.

The types of expenses you deduct will vary depending on your industry and whether you work from a commercial office space or your home office. However, here’s a list of common business tax deductions:

You can find more business expenses and rules for deducting them in IRS Publication 535.

How can you tell if something is tax deductible?

Deductible expenses are those that are essential to running your business. According to the IRS, they must be ordinary and necessary. Many of these may be a part of common business tax deductions.

If an expense isn’t necessary to run the business or it falls under any of the following categories, it’s not tax deductible:

How do you keep track of business expenses?

Keeping track of business expenses can seem overwhelming, especially with the many expense categories available on tax returns.

With a little organization and time, though, you can categorize your business expenses quickly and efficiently. Here’s how:

Have a separate business bank account.

Don’t combine business and personal accounts. Instead, open a separate business bank account and only use it for business transactions. Not only is it easier to find your tax-deductible business expenses, but you limit your personal liability by keeping business and personal funds separate. With a free Square Checking1 account and debit card, you can access, spend, and manage your money as soon as you make a sale. 

Open up a dedicated business savings account.

In addition to your business checking account, consider opening a business savings account to set aside funds for taxes, emergencies, or future investments. It’s a simple way to stay financially prepared and build a financial cushion as your business grows. With a free Square Savings2 account, you can automatically set aside a percentage funds with every sale and organize your funds into folders for long term savings or everyday expenses – all while earning 1.00% APY.

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Use a business credit card.

Avoid using your personal credit card for business expenses, as it can be hard to differentiate which expenses are which — especially if you wait until tax time.

Keep a separate business credit card to monitor expenditures and ensure you deduct every allowable business expense. You can pull statements and run reports on your credit card to ensure you’ve captured each one.

Keep digital copies of receipts.

Make it a habit to scan your receipts after every purchase. Then, store the records on your computer or in the cloud for safekeeping. It’s much easier to reference your expenses at tax time if you don’t have to rifle through a shoebox full of receipts.

Use accounting software (or outsource your bookkeeping).

Using accounting software that links with your bank account for automatic importing ensures you don’t miss any transactions and that your expenses are properly categorized. Of course, you should manually review the transactions to ensure they’re in the proper category, but it takes much less time to reconcile this way than manually entering every transaction.

If you don’t have enough time to handle your own bookkeeping or it just feels daunting, you can outsource it to an online bookkeeping service like Bench. They use proprietary software and a dedicated bookkeeping team to import bank statements, compile financial transactions, and generate financial statements every month. It’s the perfect way to stay in your zone of genius and work on growing your business instead.

Taking advantage of every tax-deductible expense will increase your business’s cash flow and make it easier to operate. Automating the reconciliation of your expenses is the best way to ensure you get every deduction available.

If the IRS, filing deadlines, or a backlog of bookkeeping is keeping you up at night, our partners at Bench are here to help. Get your bookkeeping and taxes done in one place with Bench Accounting. Their experts work together to organize your books, provide unlimited tax advisory, and maximize your income tax returns so you can file with confidence. In fact, they can take care of your filing too. Try them out for free today.

1. Block, Inc. is a financial services platform and not an FDIC-insured bank. FDIC deposit insurance coverage only protects against the failure of an FDIC-insured deposit institution. If you have a Square Checking account, up to $250,000 of your balance may be covered by FDIC insurance on a pass-through basis through Sutton Bank, Member FDIC, subject to aggregation of the account holder’s funds held at Sutton Bank and if certain conditions have been met. See Terms and Conditions. 

¹ Instant availability of Square payments. Funds generated through Square’s payment processing services are generally available in the Square Checking account balance immediately after a payment is processed. Fund availability times may vary due to technical issues.

ACH transfer fund availability: Instant availability does not apply to funds added to the Square Checking account via ACH transfer. ACH credit transfers to your account may take 1–2 business days.

² Square Debit Card is issued by Sutton Bank, Member FDIC, pursuant to a license from Mastercard.

³ Instant transfer requires a linked bank account or supported debit card and costs a fee per transfer. Funds are subject to your bank’s availability schedule. Minimum amount is $25 and maximum is $10,000 in a single transfer. New Square sellers may be limited to $2,000 per day. Fund availability times may vary due to technical issues.

⁴ With early deposit access, Block, Inc. may make incoming electronic direct deposits made through ACH available for up to two days before the scheduled payment date. Not all direct deposits are eligible. Early availability of direct deposits is not guaranteed and may vary from deposit to deposit. Early deposit access is automatic and there is no fee.

5 Cash deposited into your Square Checking account is generally available in your checking account balance immediately after a deposit is processed. Fund availability times may vary due to technical issues.

VanillaDirect Pay is provided by InComm Financial Services California, Inc. and by InComm Financial Services, Inc. (NMLS# 912772), which is licensed as a Money Transmitter by the New York State Department of Financial Services. Terms and conditions apply.

2.1 Savings accounts are provided by Square Financial Services, Inc. Member FDIC. Accrue annual percentage yield (APY) of 1.00% per folder on folder balances over $10. APY subject to change, current as of 2/18/2025. No minimum deposit is required to open an account. Accounts will not be charged monthly fees. Accounts are FDIC-insured up to $2,500,000. Pending balances are not subject to FDIC insurance.

2 The rate of our savings account is more than 2x the national average of 0.41% APY, based on the national average of savings accounts rates published in the FDIC Weekly National Rates and Rate Caps accurate as of 1/21/2025

3 Square Checking is provided by Sutton Bank, Member FDIC. Square Debit Card is issued by Sutton Bank, Member FDIC, pursuant to a license from Mastercard International Incorporated, and may be used wherever Mastercard is accepted. Funds generated through Square’s payment processing services are generally available in the Square checking account balance immediately after a payment is processed. Fund availability times may vary due to technical issues. Checking Accounts are FDIC-insured up to $250,000.

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