Essential business expense categories for startups.

Each time you order new office supplies, pay rent for your business, or purchase an ad, you’re covering a business expense. Broadly speaking, business expenses are the costs that your startup incurs to generate sales. 

By organizing these diverse costs into distinct business expense categories, you can effectively create budgets, correctly file taxes, and maintain accurate books. 

You'll also be able to claim the tax savings available for your company. Many business expenses are tax-deductible, returning vital funds to startup owners when tax time rolls around. Using clear business expense categories helps you identify opportunities to save, and much more. 

In this article, you'll find a list of the most common business expense categories for startups. Also, we'll go over what makes an expense tax-deductible, how to track expenses, and how to set up custom categories. 

A quick overview of tax-deductible business expenses.

From printer paper to payroll taxes, the type of business expenses you'll incur will vary. But to write off an expenditure on your income tax return, it has to meet specific IRS requirements. 

Per the IRS, business expenses are tax-deductible if they are "ordinary and necessary." IRS Publication 535 provides greater detail: 

"An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary."

As a startup founder, you've already encountered a few common business expenses. This might include travel costs, consulting fees, internet bills, state taxes, and employee wages. Some of these costs are fully deductible. Others must be calculated using specific formulas or percentages. 

List of business expense categories for startups.

Many startup owners align their business expense categories with the small business tax deductions they plan to claim. The IRS describes some of the standard expense categories in Publication 535. What matters most is that your categories make sense to you or your accountant. 

Every industry has a different set of commonly used business expense categories. Depending on the accounting tool you use, there may already be expense categories set up for you. We’ve compiled the categories that startup founders are most likely to use.

Rent or mortgage payments.

If you rent or own office space or another business location, record this in a separate category. The interest on your rent or mortgage payments is likely deductible. 

Home office costs.

Businesses based in a home office qualify for deductions, too. Using the home office deduction, you can write off costs like rent, paint, repairs, utilities, and mortgage interest. There are strict rules around what qualifies as a home office, so make sure you meet the requirements.

Utilities.

Include the monthly costs of electricity, gas, water, air conditioning, and trash. If you rent or lease your business location, utility costs may be built into the rent. Remember to include the costs of cellphones and internet access as well.

Furniture, equipment, and machinery.

Generally, a business purchase that will last longer than a year is considered a business asset rather than an expense. This includes items like desks, laptops, machinery, and point-of-sale systems.

Deductions for assets are treated differently. You must either deduct the asset’s entire cost in the first year you bought it or deduct the cost of depreciation. Consult a tax professional to make sure your bookkeeping is handled correctly.

Office supplies.

Office expenses are one of the most common categories. Track your spending on pens, folders, disinfectant wipes, trash bags, and other cleaning supplies, so no purchases slip through the cracks. 

Advertising and marketing.

These are the costs of promoting your brand. You might include pay-per-click ads, billboard placements, giveaways, and even business cards. If you pay a graphic designer for a website image, you could include that here, or file it under professional fees. 

Website and software expenses.

Include fees for your domain name, web hosting, maintenance, and more. Don't forget to capture your software as a service (SaaS) spending. Website builders like Squarespace and accounting software like QuickBooks are a couple of examples.

Entertainment.

Business entertainment expenses are not tax-deductible, but you’ll still want to track entertainment spending closely. Tickets to sporting events, galas, and networking events fall into this category.

Business meals and travel expenses.

The IRS watches these categories closely. If you want to deduct meal and travel expenses, you need to keep accurate records and receipts. Note that business travel constitutes travel outside city limits, including vehicle costs, airfare, accommodations, and meals.

Vehicle expenses.

Track gas, oil, insurance, and repair and maintenance spending. There are two options to write off the costs of using your vehicle for business. You can use the standard mileage rate option or the actual expense option. As we mentioned earlier, you may want to consult a tax professional for more detail. If you buy a vehicle and want to deduct depreciation costs, the vehicle must be driven for business purposes at least 50% of the time.