Expense management can be complicated. It takes accurate organization and tracking to not only keep within budget, but also help towards your overall business goals.
Understanding and using business expense categories can help with expense management, as well as save money and potentially lower taxes.
But what are business expense categories and how can they be a useful tool for your business?
Read on to find out more.
Business expense categories explained
Any cost to run your business can be categorized as an expense, if calculated and documented properly.
Expense categories further sort these costs into the relevant areas. These can vary from business to business, depending on the sector they’re involved in.
Some common categories include:
- Rent and utilities
- Office supplies
- Vehicle expenses
- Employee wages or salaries
- Interest payments
- Advertising and marketing
- Travel expenses
Other categories can include Software as a service (SaaS) subscriptions, training and learning for employees, charitable contributions or specialist equipment, depending on the type of business.
Keeping your expenses categorized can help with organization, making it easier to record and track spending, but there are a range of benefits to using business expense categories.
1) Help to follow the IRS tax regulations
Incorporating business expense categories into expense management, can help when it comes to tax season.
Following the IRS guidelines is crucial, so you know what can be claimed for tax deductions. When your expenses are sorted into the relevant categories, you can see how much is being spent and where, whilst making sure corporate spend has been kept within the IRS limits.
This makes it much easier to plan and file business expenses in accordance with IRS Publication 535.
For example, for the tax year 2022, a change in law stated the standard mileage rate for the cost of operating your car, van, pickup truck, or panel truck for each mile of business use is 58.5 cents per mile.
You or your finance team can then simply analyze the spend in the vehicle expense category, if using the standard mileage rate option, to see the amount that is tax deductible based on the change in tax law.
Meticulous organizing and categorizing can also help plan for the next fiscal year, allocating spend depending on past expenses, and which categories need more or less budget.
2) Maximize tax deductions for your business
You can keep a detailed and accurate record of all costs using business expense categories, which then can help maximize tax deductions.
If your expenses aren’t properly categorized, it can be hard to clearly see what and where your business has spent money, and if there are any matching, relevant receipts for these transactions.
Through expense categories, these accurate records can justify why the expense was a necessary cost for the business, in terms of the IRS definition of an expense.
It also makes it easy to clarify which expenses qualify as tax deductible, as not every category will be eligible.
A detailed record of expenses, with relevant categorization, means you can properly deduct business costs, and potentially save you considerable amounts in taxes.
3) Make things easier for your accountant
Categorization makes the process simpler for everyone, including your accountant. Even better still, if using an expense management software, you’ll find it can integrate with your accounting software.
Some expense software also has predetermined categories which you can automatically organize your expenses in to.
When your expense categories are clearly defined, and recorded accurately with matching invoices or receipts, your accountant can easily help and advise you on what expenses are and are not tax deductible.
4) Organize expenses as they occur
Business expense categories work seamlessly with expense management software and virtual corporate cards. As a transaction is made, the expense can be automatically sorted into the correct category.
This is because a virtual card will be created for each of your predetermined expense categories, so you and your finance team can monitor exactly what is going out of each account, and therefore being spent in that area of the business.
With virtual cards, all transactions can be easily monitored as they’re made. There’s also the ability to set spending limits and expiry dates, making it smoother to control the costs in each expense category.
5) Provide an overview of corporate spend
Different industries will have different costs, and so you’ll need categories based on your industry.
If you provide a delivery service, then you’ll need to manage vehicle expenses. Likewise, a tech company will spend more on computers, equipment and software.
With the correct business expense categories in place, you and your finance team can have a clearer picture of how much is being spent in each area of the business.
This can help future plans, changing budgets or spending where necessary.