Business Expense
Summary Definition: Any cost a company incurs during regular operations, typically to generate income or support essential business functions.
What is a Business Expense?
Business expenses are any costs a company takes on as part of its normal operations, typically to expand, earn income, or keep the business running smoothly (e.g., rent, employee wages, travel, advertising, etc.).
For an expense to qualify as tax-deductible, it must meet Internal Revenue Service (IRS) guidelines by being both ordinary (i.e., common in the business’s industry) and necessary (i.e., helpful and appropriate for the business).
Key Takeaways
- A business expense is any ordinary and necessary cost incurred as part of running a company, many of which may qualify for tax deductions.
- Business expenses fall into distinct categories, such as Cost Of Goods Sold (COGS), capital, and personal, each with specific rules for deductibility that impact budgeting, tax reporting, and compliance.
- Accurately tracking, categorizing, and filing business expenses using dedicated tools or software ensures valid write-offs, reduces audit risk, and strengthens overall financial management.
What Are the Different Business Expense Categories?
Business expenses come in many forms, and not all are treated equally when it comes to budgeting or tax deductions. Therefore, understanding the different categories helps ensure accurate reporting, better financial planning, and maximum write-off eligibility.
Ordinary and Necessary Expenses
Ordinary and necessary expenses are the routine, everyday operating costs that keep a business running. They’re generally accepted as standard in the company’s industry, which makes them the easiest expenses to track and deduct.
Specifically, IRS Publication 535 requires ordinary expenses to be commonly used in the organization’s line of work and necessary expenses to be appropriate and helpful for its operations. Common examples include utilities, office supplies, insurance, professional services, etc.
Other Expense Types
Conversely, some business expenses require different accounting measures. While some are immediately deductible, others must be capitalized or partially allocated for business use.
| Expense Type | Description | Deductibility* |
| Cost of Goods Sold (COGS) | Direct costs to produce or purchase products for resale, such as raw materials, direct labor, manufacturing, or shipping. | Deducted via gross profits (i.e., subtracted from gross receipts to calculate gross income), and not reported as a separate expense. |
| Capital Expenses | Long-term investments in assets like equipment, vehicles, or property that add value or extend usefulness. | Not immediately deductible and typically depreciated or amortized over time. |
| Personal Expenses | Costs unrelated to business activities (e.g., commuting, family meals). May be partially deductible if clearly separated for business use. | Not deductible unless partially used for the business (e.g., home office or personal vehicle for work). |
*Per IRS guidelines
How to Write Off Tax Deductible Expenses
Writing off business expenses is the process of claiming business expense deductions on a tax return to lower overall taxable income. While this can result in significant savings, not every business expense qualifies as a tax write-off.
To ensure accuracy and compliance, it’s essential to understand what’s deductible, how to track and categorize expenses, and how to file tax write-offs with the IRS correctly.
Deductible and Non-Deductible Expenses
Unlike deductible expenses (e.g., ordinary and necessary costs, COGS, capital expenses, etc.), non-deductible expenses are typically personal or prohibited by law, even if paid with business funds. Examples include:
| Deductible Business Expenses | Non-Deductible Business Expenses |
| Employee wages and payroll taxes | Personal living expenses (unless clearly allocated for business use) |
| Rent for business property | Commuting costs between home and regular workplace |
| Office supplies and equipment | Fines or penalties paid to government agencies |
| Utilities and internet (for business use) | Political contributions or lobbying costs |
| Business insurance premiums | Club dues or memberships (unless directly related to business entertainment or networking) |
| Professional services (e.g., legal, accounting, advertising, etc.) | Entertainment expenses (except meals with business purpose under IRS limits) |
| Travel for work-related purposes | Gifts over $25 per recipient per year |
| Marketing, advertising, and branding | Personal meals or travel unrelated to business |
How to Track Business Expenses for Taxes
Consistently tracking each business expense is one of the most important financial and budgetary measures a company can take. Without organized records, organizations risk missing business tax write-offs, misclassifying transactions, or failing to comply with IRS requirements.
Effective expense tracking involves recording key details for every transaction, including:
- Date of purchase
- Vendor name
- Amount spent
- Payment method
- Business purpose
- Expense category (e.g., travel, utilities, software, etc.)
Many organizations simplify this process by using business expense software, a business expense tracker (e.g., a business expense spreadsheet or business expense app), or a business expense manager service provider. These solutions can automate categorization, reduce manual entry errors, and help ensure no valid company deductible expense is overlooked.
Filing Deductible Business Expenses
After business expenses are accurately tracked and organized, the next step properly reporting them on a tax return. In other words, translate all financial records into compliant, categorized entries that meet IRS reporting requirements. When doing so, it’s important for businesses to:
- Verify each expense meets the IRS “ordinary and necessary” criteria
- Ensure documentation (e.g., receipts, logs, invoices) is complete and readily accessible
- Use the appropriate tax form based on the company’s structure (e.g., Schedule C, Form 1120, or Form 1065)
- Categorize expenses consistently with IRS guidelines to avoid red flags during audits
For items that fall into gray areas or involve partial deductions (e.g., home office use or vehicle mileage), consult IRS guidance on business expenses or a tax advisor to maximize eligible deductions.
