What qualifies as a business expense?

A business expense is any cost that is both ordinary (common in your type of business) and necessary (helpful and appropriate for business operations). These expenses must be directly related to the business, not personal in nature, and must contribute to generating income or maintaining the company.

How to categorize business expenses

Record under Operating Expenses in your income statement unless directly tied to production (then record under Cost of Goods Sold).
Use clear categories in your chart of accounts such as Rent, Utilities, Payroll, Marketing, or Supplies.
Keep business and personal expenses separate; personal costs are never deductible.
For mixed-use expenses (like a phone or car), only deduct the business-use percentage.
Maintain receipts and documentation for all expenses to support tax deductions.

Examples of common business expenses

Rent or lease payments for office or warehouse space.
Utilities like electricity, water, and internet.
Office supplies, furniture, and equipment.
Employee wages, benefits, and payroll taxes.
Marketing and advertising costs.
Insurance premiums (liability, property, or health).
Professional services such as accounting, legal, or consulting fees.
Travel, meals, and client entertainment (subject to IRS limits).
Software subscriptions and digital tools.
Business vehicle expenses or mileage.

Tax implications for business expenses

Business expenses are tax-deductible if they are ordinary, necessary, and directly related to your business.
Expenses that create long-term value (like equipment or vehicles) must be capitalized and depreciated rather than deducted all at once.
Personal or hobby-related expenses are not deductible.
Keep organized records and receipts to substantiate all deductions in case of an IRS audit.
If an expense benefits both business and personal use, deduct only the business-related portion.
Review IRS Publication 535 for specific deduction categories and rules.