The expense list for small businesses: Maximize your deductions in 2023

When was the last time you looked at the expense list for your small business? As your company evolves, your expense list inevitably must, too. 

Neglecting your business expense list could mean you’re leaving money on the table. 

The new year brings fresh opportunities to enhance how you operate your small business. With tax season nearly upon us, now is the ideal time to tighten up your approach to expense categorization. It may also be worthwhile to check in on your expense documentation requirements — and ensure those rules are followed consistently. 

What is the best way to structure an expense list for small businesses? We consulted with the Internal Revenue Service Publication 535 for an authoritative perspective, though the IRS stops short of providing a list of qualified business expenses. Ultimately, it’s up to the CEO and CFO to decide — under the guidance of certified tax and accounting professionals — which expenses to write off and why. 

While every small business expense list will look different, follow these guidelines to develop an orderly, rigorous categorization procedure that will make tax season, audits, and FP&A easier to navigate. These efforts will also serve to protect your hard-earned profits by maximizing your business tax strategy and increasing the accuracy of your tax filings. 

Disclaimer: This article offers general guidelines on what can and cannot be expensed and suggestions on categorizing said expenses. You must consult a certified tax professional to ensure compliance with all applicable laws.

What are business expenses?

Quick refresher: business expenses are the costs incurred to run a business. Anything from office supplies to asset depreciation count as business expenses. Some business expenses are also referred to as deductions, business deductions, or tax deductions if and when the tax authority deems them eligible. 

What makes business expenses important isn’t only related to budgeting, planning, and cash flow management: they also play a definitive role in small business tax strategy. 

Net income is revenue minus qualified business expenses, and your tax obligation is calculated from net income. Therefore, failing to capture and categorize all eligible business expenses on your financial statements can translate to a larger (and less accurate!) tax burden. 

Let’s be clear on one point: the advice here isn’t to spend more on business expenses. Rather, you should strive to categorize and manage your deductions as effectively as possible — with no expenses slipping through the cracks. If you do, the payoff is great: enjoying greater tax savings, year after year, and strengthening your financial planning process as a whole. 

What are business expense categories? 

Business expense categories provide essential structure to recording and organizing company deductions. What distinguishes these categories is the nature of the expense and how the IRS and your accountants treat them. 

Business expense categories, when rigorously applied, enable greater accuracy for internal financial reporting, tax preparation, and expense forecasting. 

When developing your business expense categories, consider:

• Intuitiveness: Will employees who submit expense reports understand which categories to use without consulting a playbook?
• Reporting requirements: Do the categories align with financial reporting obligations?
• Tax requirements: Are you assigning expenses to categories with identical tax-write-off rules?

List of business expense categories for small businesses

All small businesses are unique and will adjust their approach to expense taxonomy according to their particular use cases and obligations. 

We’ve curated a list of 18 common business expense categories. While non-exhaustive, use it as a jumping-off point to begin building the categories that best fit your company (under the supervision of certified tax and accounting professionals, of course). 

1. Salaries and compensation:

The cost of employing people is a tax-deductible expense for your small business, including gross wages, bonuses, commissions, and any other form of cash-based compensation. The costs associated with administering employee benefits should be categorized elsewhere.

2. Employee benefit programs:

Health and dental, life insurance, disability insurance, family planning, and workers’ compensation plans are eligible business write-offs. (Tally this expense category with #1: Salaries and compensation, then divide by the number of employees to calculate the average cost per employee.) 

3. Office supplies:

Paper, pens, cleaning products, and employee snacks all count as office expenses. Think of miscellaneous items used frequently or occasionally to help the office run smoothly. 

Note that you should book technology under a different category, such as employee laptops and other IT equipment (see #11: Depreciation).

4. Postage and shipping:

This houses the costs of mailing letters and packages, even if the shipments are related to other categories, such as direct mail advertising.

5. Legal and professional services:

The costs of retaining external legal counsel, an accountant or accounting firm, and tax planners reduce your tax liability. Other professional services, such as management consultants, IPO planners, PR services, and marketing agencies, also apply here. 

6. Insurance:

Liability, malpractice, and real estate insurance premiums are 100% deductible business expenses. 

7. Rent:

If your small business rents office space, warehouses, and other facilities to support your operations, you may claim rent as a business deduction. 

For the self-employed, a portion of your rent may be deducted based on square footage calculation — and they must solely use the space for business purposes. 

8. Utilities:

Telephone, internet, gas, water, trash, and electricity bills for applicable business-related facilities are fully deductible. 

9. Mortgage interest:

If the business owns real estate assets and is currently paying down a mortgage, the interest portion of your payments is a qualified business expense. The mortgage principal is not deductible, though. 

10. Real estate taxes:

Annual real estate taxes paid for company-owned properties are another facility and tax-related business expense. 

11. Depreciation:

Rather than claiming an asset’s cost as a business expense in the purchase year, depreciation allows you to allocate its diminishing value to your business over its lifetime. Depreciation is commonly used for big-ticket items such as manufacturing equipment, IT equipment expenditures, and company vehicles. 

You cannot claim both depreciation and the total asset cost as business expenses: you must choose one or the other. 

Depreciation is a complicated expense category requiring an accountant’s guidance to address and maximize it for your company’s tax strategy.

12. Travel:

Eligible travel expenses are tax-deductible. 

Travel is a hotly-debated expense category among business travelers and budget controllers. It includes flights, hotels, and ground transportation, but not meals. Most businesses enact strict rules related to business travel: 

• Permitted fare types (Economy, business, first)
• Daily hotel room rates
• Driver, concierge, and housekeeping tips
• Cash versus expense card purchases

Client entertainment, such as tickets and gifts, are generally not tax deductible. 

13. Meals:

Business meals, including client and team meals, are deductible up to 50% of the total cost. In response to the COVID-19 pandemic, the IRS temporarily expanded this expense category to cover 100% of business meals between December 31, 2020, and December 31, 2022. 

Businesses can look to GSA per-diem rates for guidance on how much to allot for meals based on the location’s zip code. 

14. Client and employee gifts:

Celebrating your employees and client partnerships with gifts of reasonable value may be a qualified business expense. According to the IRS, up to $25 per gift is tax-deductible, with a few restrictions. 

15. Software:

A fast-growing category, small businesses leverage a variety of software to power operations. SaaS subscription fees apply to this category. Onboarding costs and other professional services may apply elsewhere (see #5: Legal and professional services). 

16. Advertising:

The costs associated with marketing your business, such as media buying fees, website development costs, and other promotional materials, may be categorized here. In some instances, you may want to also tag retainer fees for marketing and PR agencies here instead of under #5: Legal and professional services. 

17. Membership dues and subscriptions:

If you opt to join an industry association or subscribe to industry-related publications, you may claim dues and subscription costs as business expenses. 

18. Mileage: 

Employees who use their personal vehicles for business may claim mileage costs for reimbursement. Small businesses may claim said mileage expenses as a deduction. 

Effective July 1, 2022, the reimbursement rate is 62.5 cents per mile. Mileage to and from the office as part of a regular commute typically does not count as a qualified expense.  

What can and can’t be written off as a business expense?

According to the IRS:

“To be deductible, a business expense must be both ordinary and necessary. 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.”

What this means for small businesses: while the IRS does not offer a detailed list of what you can or cannot write off, it does indicate broad categories and use cases to help you make well-informed decisions for your tax strategy. 

How to make sure expenses are categorized correctly

It is always necessary and useful to rely on your CFO and accounting staff to determine whether a business expense is tax deductible or not and how to categorize each expected expense for your business. 

If your business operates overseas, consult with local tax experts — rules and appropriate categorizations will typically differ across different nations and jurisdictions.  

Step 1: Set up business expense categories

Leverage expert tax and accounting advice to design your business expense categories. Ensure all software, financial statements, and other locations using business categories are updated. 

It may be helpful to assign primary categories and subcategories nested beneath them. Consult with all business expense category stakeholders: accounting leads, department heads, and budget controllers should all have a say. 

Step 2: Develop and document a standard operating procedure (SOP)

Implementing an SOP is the best practice to help employees categorize business expenses according to company policy. Provide training for budget managers and include this SOP in your employee onboarding process. 

Step 3: Leverage software to drive compliance 

Expense management software often provides default expense categories, but it can also be synced with your company’s expense categories. By making it nearly seamless for employees to comply with categorization rules, you can minimize your team’s time spent rectifying incorrect expense entries.

Some software providers offer automated features, such as red flags and guardrails, that help rapidly-scaling teams maintain consistency and compliance. 

How can small businesses manage their business expenses?

As you go through the process of developing business expense categories, you may come across a common issue. Accountants and budget controllers may desire different structures to satisfy the requirements of their respective roles. 

Ultimately, you will need to balance tax and financial reporting requirements with usability. What the IRS or your investors want to see in your reports may not align with the most efficient process for your teams. 

CFOs and other decision makers related to business expenses: hear out your stakeholders. Weigh your options, and select the best-fit categories for your business. Consider hosting annual internal audits and feedback sessions to ensure the taxonomy is usable, intuitive, and serving its purpose to maximize tax deductions and enable transparency into company spending.