How to Categorize Expenses for Small Business: Categories to Consider
You can categorize your expenses for small business by developing a list of popular headers that each charge can be assigned to. Categorizing expenses will be helpful in keeping your company organized, for budgeting purposes as well as in assessing which expenses can be written off at tax time.
- Advertising Expenses
- Business Vehicle(s)
- Employee Benefits
- Meals & Entertainment Expenses
- Office Expenses
- Office Supplies
- Professional Services
- Rent, Utilities & Phone
- Travel Expenses
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
1. Advertising Expenses
Advertising Expenses should include any amount spent on ads for your business that appear in television, newspapers, radio, print or digital magazines, billboards, and direct mail. This category should also include charges related to online display or video ads, social media, SEM (or paid search), email marketing, sponsored content and remarketing. You should also include the actual production cost of the ad here.
2. Business Vehicle(s)
It’s important business vehicles are part of this list because the many expenses related to the use of an automobile can add up considerably. You’ll want to keep track of the amount spent on:
- Maintenance and repairs
- Gas and oil changes
- Tire replacement
- Registration fees and taxes
- Vehicle loan interest
- Lease payments
- Garage rent
Keep in mind that any personal use of the vehicle could unnecessarily inflate some of these figures. That doesn’t mean your company car policy shouldn’t support personal use, you will just want to figure a way to divide the charges between ‘personal’ and ‘business’.
Wages for staff are typically the biggest expense for most companies. You’ll want to see how much it’s costing your company just to man it, which can help you develop cost saving strategies for the future.
4. Employee Benefits
Ever had a friend or business contact say “the benefits at my company are great!”. Well, they’re talking specifically about the additional compensation they are receiving in their jobs that are not wage related. These benefits are designed by businesses to attract and retain talent. Common employee benefits include:
- Group Insurance (health, dental, life and disability)
- Education and Training (including conferences)
- Paid Vacation
- Sick Days
- Child care
- Retirement benefits
There are other types of employee benefits like housing and domestic help, but they mainly apply to very large businesses.
5. Meals & Entertainment Expenses
Breakfast, lunch, dinner - even a trip to the local Starbucks, if business is discussed, it can be included here.
Entertainment in the form of events, such as treating the staff to a concert, or taking out those big clients to a sporting event, should also be included in this category. Holiday parties are also an example of what would be considered ‘entertainment’.
This category is often seen as a drain on the revenue of many companies, as it is often abused. Be sure to create an approval procedure for your staff or have a good policy in place on what qualifies for this category. Perhaps simply having a rule where you sign off on on this type of request in advance is enough.
Tip: Expenses related to business meals are the receipts most likely to get lost, so if you have a lot of them and are not recording them digitally, best to write out the business reason for them on each receipt as it will be much easier to remember what it was for later, and file them all in one place.
6. Office Expenses
Office Expenses are common costs a business incurs that are necessary in order to run the business, like purchasing new computer equipment, software, fax machine, printer, etc.
7. Office Supplies
Business supplies are tangible items like pens, paper, staplers, printer ink and postage. You should also consider listing office furniture here, as some of it may be tax deductible depending on the cost.
8. Professional Services
Professional Services are fees charged by individuals with training in a specific field, hired by your company to perform a service. These services exist because many companies do not have all the resources they need in house. For instance, maybe you don’t have an accountant on staff but need one short term or for a special project. Or you need to hire an outside agency to provide the content for your company blog. The payments of these fees would be categorized under ‘Professional Services”.
Accountants, lawyers, tradesmen, security, marketing consultants - all of these would be considered ‘professional services’.
9. Rent, Utilities & Phone
Costs incurred for renting or leasing your place of business would be included here. If you own the property your business is situated on, or work out of your home, you still want to track those expenses too. Don’t forget your utilities and phone.
10. Travel Expenses
This is any expense incurred when travel is undertaken for the benefit of your business, like a sales trip or business meeting. This includes airfare, cabs, food, laundry and long distance telephone calls as well as any necessary purchases required to make the trip.
Other Questions Related to How to Categorize Expenses for Small Business:
What Can I Write off for Business Expenses?
The IRS states on their website that in order for a business expense to be deductible on a tax return, the expense must be both “ordinary and necessary”. One of the primary reasons for categorizing and tracking your expenses is so that they can be properly assessed for tax breaks at year end. However, not everything is allowed to be written off, and some categories only allow for a partial tax break.
The IRS is responsible for ultimate approval on what your small business can submit as write offs. For more on that, check out this IRS page on “Deducting Business Expenses”.
Can I Write off My Business Start up Costs?
There are situations where businesses can write off their start up costs. It really depends on the size of the business and the overall spend. If your costs are organizational in nature (related to legal or incorporation fees), getting the business ready (for example, staff training) or research/investigation (product analysis), the IRS does allow for tax deductions.
What Are the Three Major Types of Expenses?
There are three major types of financial expenses: Fixed, Variable, and Periodic.
Fixed expenses are expenses that don’t change for long periods of time, like office rent or vehicle lease payments for you or your staff. Variable expenses change from month to month, such as utilities or meals and entertainment. Periodic expenses are expenses that happen infrequently and are hard to plan for, such as car repairs or an emergency trip.
Variable and Periodic expenses often need more scrutiny, especially by small business owners, as there can be quite a variance from month to month.