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.

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.

The bottom line

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.


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