Owning a business means that every dollar counts — especially when it comes to taxes. There are going to be costs strictly related to business purposes that you’ll want to correctly notate. It can be easy to throw away receipts and invoices once we’re done like personal documents, but now it’s important to ensure you know where your money is going.
What is Considered a Business Expense?
Let’s start with the basics: a business expense is any cost that’s ordinary and necessary to run your business. That’s the IRS’s standard. Basically, if it’s something you use regularly in your industry and it helps you operate, it likely qualifies.
Some of the most common examples are:
- Office supplies (pens, ink, paper)
- Software subscriptions (Canva, Google Workspace, Microsoft Office, etc.)
- Internet and phone — the business used portion
- Travel and food while meeting clients or at conferences
- Contractor payments or freelancer fees
- Marketing expenses (ads, website hosting)
- Rent Expense
- Business Use of Your Home (specific guidelines)
It’s important to note that the cost must be directly tied to business activity to be considered a business expense. If it’s helping your business maintain or grow, track and label it properly.
How Can You Find Tax Deductions?
Here’s where good classification pays off: tax deductions. When your expenses are organized and labeled correctly, it’s way easier to spot deductions. The more accurate you are, the less likely you are to miss out. Finding tax-deductions in your business expenses is going to allow you to subtract them from your income to lower your taxable income.
Things to look for are:
- Recurring costs (Rent, subscriptions)
- One-time purchases (equipment and set up fees)
- Overlooked items (milage, work phone, continued education, etc.)
If your books are a mess or your categories are too broad (like everything dumped into “miscellaneous”), you’re probably missing some of these.
IRS Compliance: Why It Matters
The IRS requires you to keep accurate records of your business income and expenses. If you’re audited, the first thing they’ll look at is whether your expenses are correctly categorized and supported by receipts or documentation. You’ll want to be able to show them:
- That your expenses were real
- That they were for business, and
- That they were correctly categorized
By categorizing your expenses incorrectly, it can lead to:
- Losing out on deductions
- Triggering red flags on your tax return, and
- Potential penalties or interest
The most common IRS tax form used to categorize expenses is though Schedule C on Form 1040. Additionally, if your numbers don’t match the expected format, it could invite further complications.
Mistakes to Avoid
Mistakes do happen, and we want to minimize that possibility as much as possible. We’ve listed common mistakes to watch out for while categorizing your expenses.
- Mixing business and personal expenses. While it may be tempting, keeping things separate will reduce risk for penalties.
- Not splitting expenses. If your internet or phone is used for business and personal use, you should only deduct what’s used for business use.
- Using “Miscellaneous” for everything. Putting everything into one vague pile can lead to suspicion, further reducing any financial clarity.
- Lack of documentation. No receipt or invoice? No deduction (especially for travel, meals, or gifts)
Whether your business is large or small, it’s worth creating good habits from the beginning.
We Can Help
Classifying your business expenses properly might not be the most exciting part of running a business, but it’s one of the most significant. It helps you stay IRS-compliant, uncover tax deductions you might not realize you qualify for, and give you a clearer view of where your money’s going. If you’re feeling stuck or unsure where to start, we can help. Whether you need a simple checklist, a second look at your expense categories, or just someone to walk through it with you, we’re here to make the process easier — and more rewarding.
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