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Every business, from a large corporation to a freelance side hustle, has one thing in common: expenses. These are the costs incurred during the process of generating revenue.
According to a Q2 2025 survey by the US Chamber of Commerce, 69% of small businesses report their business is in good health, a figure heavily influenced by their ability to manage and understand their business expenses.
In this guide you’ll learn what costs constitute business expenses, why it’s important to track them, and how they impact your taxable income, so you can feel confident in your company’s financial health.
What are business expenses?
Business expenses are the costs incurred by a company in order to generate revenue. The Internal Revenue Service (IRS) defines them as ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.
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Ordinary expenses. These are common and accepted in your industry or business.
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Necessary expenses. These are helpful and appropriate for your trade or business.
Businesses must maintain records showing the amount, date, place, and business purpose of each deductible expense. Business expenses are a major component of a company’s income statement. They are subtracted from revenue to calculate the operating profit. Using accounting software like QuickBooks can help ensure expenses are accurately recorded.
Accurately recording business expenses is also critical for tax purposes. By correctly documenting deductible expenses, business owners can lower their taxable income, which reduces their tax liability. Failing to differentiate between personal and business expenses can lead to an overstatement of profits and an incorrect tax bill. To ensure you are up to date on current tax regulations, it’s best to consult a tax professional.
Business expense categories
Not all expenses incurred fall into the same category. Businesses have various types of expenses, which you can categorize in multiple ways:
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Fixed expenses. These costs remain constant regardless of the volume of goods or services produced. Examples include lease payments, insurance premiums, and employees’ salaries.
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Variable expenses. These costs fluctuate with business activity. Examples include raw materials, shipping costs, and sales commissions.
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Operating expenses. Also known as OpEx, these are the costs associated with a company’s day-to-day operations. Examples include office supplies, utility expenses, marketing costs, and legal and professional fees.
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Capital expenditures. Also referred to as CapEx, these are costs for major purchases or business assets with a long-term benefit, such as emergency equipment repairs, vehicles, or business property. These are not immediately deducted but are recovered over time through depreciation costs.
Business expenses that are tax deductible
A wide range of business-related expenses can be deducted to lower a company’s taxable income. As the IRS maintains, deductible expenses must be ordinary and necessary for the business. Here are a few common types of tax deductions according to the IRS, with examples for each:
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Office expenses. Costs for a business office, including rent, utilities (electricity, gas, and water), and internet. Example: Paying the monthly rent for your office space.
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Office supplies. Items like paper, pens, and postage. Example: Purchasing a new printer and ink cartridges for your home office.
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Legal and professional fees. Payments to lawyers, accountants, and consultants. Example: Paying an accountant for tax preparation services.
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Marketing and advertising. Costs for promoting your business. Example: Running an online ad campaign on social media.
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Business travel expenses. Costs for business trips, including airfare, lodging, and car rentals. Example: The cost of a hotel room while attending an out-of-state conference.
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Auto expenses. Vehicle costs for business use, which you can calculate using the standard mileage rate or the actual expenses method. Example: The cost of gasoline for a delivery vehicle.
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Business meals. Meals with clients or colleagues that are directly related to the active conduct of your business. These are often 50% deductible. Example: Taking a client out to lunch to discuss a new project.
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Insurance. Premiums for business-related insurance, like liability insurance or property insurance. Example: The monthly payment for a general liability insurance policy.
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Interest expenses. Interest paid on business loans or credit cards used for business purposes. Example: The interest portion of your monthly payment on a loan for new machinery.
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Depreciation deductions. The expense of a business asset spread out over its useful life. Example: Deducting a portion of the cost of a new computer each year for several years.
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Home office deduction. For those who use a portion of their home exclusively and regularly for business. Example: Deducting a portion of your rent or mortgage, utilities, and insurance based on the percentage of your home used for business.
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Wages and salaries. Payments to employees. Example: Paying your employees their regular biweekly salary.
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Rent. Payment for use of a building or equipment. Example: Rent for a warehouse to store your products.
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Education and training. The cost of seminars or classes to maintain or improve your skills. Example: Paying for a certification course directly related to your profession.
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Repairs and maintenance. Costs to keep business property in good working condition. Example: Hiring a professional to fix a broken air conditioning unit in your office.
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Supplies. Raw materials and components to create your company’s products. Example: Purchasing fabric for a clothing manufacturer.
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Subscription fees. Fees for business-related services or software. Example: A monthly subscription fee for an accounting software.
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Health insurance.The cost of employer-provided health coverage. Example: Monthly health insurance premiums.
Business expenses that are not tax deductible
Not all expenses are deductible. The IRS has strict rules about what it considers a legitimate business expense. Here are a few examples of costs related to a business that are not tax-deductible:
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Personal expenses. Costs that are not for operating your business. Example: The cost of a personal grocery trip, even if you run a bakery from home.
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Commuting costs. The expense of traveling between your home and your primary workplace. Example: The cost of gas for your daily commute to the office.
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Fines and penalties. Money paid as a result of violating a law. Example: A fine for a traffic violation while driving a company car.
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Lobbying expenses. Costs related to influencing legislation. Example: Payments to a lobbyist to help change a city ordinance.
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Political contributions. Payments to political parties or candidates. Example: A donation to a political campaign.
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Life insurance premiums. Premiums for a policy where the business is the beneficiary. Example: A company paying the premium for a life insurance policy on its CEO.
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Club dues. Fees for social, athletic, or sporting clubs. Example: Dues for a private golf club used for client entertainment.
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Clothing. The cost of work attire, excluding uniforms. Example: The cost of a business suit for an employee.
How to keep track of business expenses
Here are a few tips to help simplify the process of tracking business expenses:
1. Keep business and personal finances in separate accounts. If you haven’t already, sign up for a business bank account and use a designated credit card for all business purchases. This helps prevent the mixing of your business and personal funds.
2. Install accounting software. Implement accounting software so that you can automate expense tracking. Platforms like Xero, QuickBooks, or FreshBooks can make it easier for you to categorize expenses, generate reports, and simplify tax season.
3. Digitize receipts. Save and scan all receipts using a mobile device or a digital filing system. Digital copies are easy to organize and serve as proof for deductions.
4. Review expenses regularly. Reviewing on a weekly or monthly basis will assist with identifying errors, and it provides a real-time picture of your operating costs.
5. Understand deductible vs. non-deductible expenses. Educate yourself on what qualifies as a business expense to the IRS. When in doubt, consult a tax professional.
How business expenses are recorded on income statements
Business expenses appear on the income statement. This financial statement summarizes a company’s income and expenses over a designated period, such as a quarter or a year, to arrive at its operating profit or net income. Operating expenses like rent, utilities, salaries, and marketing costs are subtracted from revenue to show the company’s profitability.
While expenses are most visible on the income statement, they can also impact other financial statements:
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Balance sheet. When an expense is paid, the cash asset on the balance sheet decreases. If the expense is incurred but not yet paid, it increases a liability account, like accounts payable. The net effect of expenses on the income statement reduces retained earnings on the balance sheet, which is part of owner’s equity.
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Statement of cash flows. This statement tracks the cash coming in and going out of the business. The costs incurred for daily operations, such as paying for supplies and wages, are categorized under cash flow from operations. This provides a picture of the business’s liquidity and its ability to cover its expenses with cash.
What are business expenses FAQ
What business expenses are fully deductible?
Fully deductible expenses include office expenses like rent, professional fees, and employee salaries. Although many expenses are fully deductible, some, like business meals, are only partially deductible.
What qualifies as a business expense to the IRS?
According to the Internal Revenue Service, a business expense is ordinary and necessary for carrying on your trade or business. They include operating expenses like supplies and marketing costs, as well as capital expenditures for large assets.
Are business travel costs considered business expenses?
Yes, the costs of business travel are generally considered business expenses. For example, this might include airfare, lodging, and car rental for a trip to inspect a new manufacturer.
