How to Categorize Expenses: Examples & Best Practices

How to Categorize Expenses for Accurate Business Bookkeeping

If you begin running your business without knowing how to categorize your expenses, you’ll often end up with a giant bank statement that you don’t know how to make heads or tails out of. Without precise categories, you’ll have a much harder time reining in your budget and deducting taxes on your annual returns.

Overall, developing an expense categorization process can give you a clearer picture of where, when, and why payments are made. Without the ability to track category expenses, growing organizations can quickly become overwhelmed with charges from unexpected sources. Modern organizations utilize expense management software to automate data entry, unlock greater visibility, and take control of their business expenses.

We wrote this article to break down some typical expenses companies encounter, how they should be organized, and when business tax deductions may arise. If you’re looking for an easier way to categorize expenses without the tedious labor, you might want to consider Slash. Slash automatically records transactions and categorizes expenses across your company’s corporate cards and payments, all on a single platform.¹ With the ability to instantly sort expenditures and sync with tools like Quickbooks Online and NetSuite, you’ll get expanded control of your organization’s cashflow and a clearer path to deductions.

Integrate with QuickBooks, Xero, and Sage Intacct

Understanding Business Expense Categories

Categorizing business expenses is the act of identifying and sorting various types of payments for purposes of boosting visibility, staying organized, and taking advantage of tax deductions. For example, the cost of employee health insurance should be logged separately on the balance sheet from employee salaries.

For the record, expense categorization shouldn’t be confused with budgeting; budgeting cuts back on spending, while categorizing clarifies and reports it.

Sorting business expenses effectively is beneficial for scaling companies and finance teams that are looking to keep accurate records and get the most out of their spending. It’s also key for high-volume spenders that could deduct lots of purchases from their tax returns, provided they keep track of those purchases accurately.

Common Types of Business Expenses

Before getting into the specific categories, it helps to understand the two ways accountants group costs. This mainly revolves around their behavior over time:

Fixed expenses stay the same in total regardless of how much business you do. Rent, insurance premiums, and salaried payroll cost the same whether you have a record month or a terrible one. They're predictable, which makes them easy to forecast, but they’re also the costs that hurt most during a slow quarter because they don't scale down with revenue.
Variable expenses rise and fall with activity. Raw materials, payment processing fees, shipping, and sales commissions all move with volume, so a busy month costs more than a slow one. The per-unit cost stays roughly constant while the total moves.

Some costs are somewhat mixed, meaning they have a fixed base plus a usage-based component. Utilities are a classic example, since most bills combine a flat service charge with a rate that depends on consumption. Treating them as purely variable will make your forecasts slightly wrong.

Certain business expenses are tax deductible, but only in certain scenarios. Good news; we purpose-built Slash’s expense tracking software to cure the headaches associated with sorting these manually.

How to Categorize Expenses: 15 Standard Business Expense Categories

The categories below cover the majority of what most businesses spend money on. Names vary between accounting platforms and industries, so what QuickBooks calls one thing Xero may call another. Overall, it’s best to use these these as a starting point:

Materials

The purchasing of raw materials is a pivotal factor for any manufacturer or construction company’s profit margins. Knowing the cost of goods, how much you’re spending on materials, and how often transactions are made is a great way to keep operations organized. Materials are also one of many business expense categories that can be tax deductible.

Office Supplies

Along with the standard pens and paper, office supplies can encompass computers, internet, wi-fi, printers, ink, bathroom supplies, telephones, and a host of other miscellaneous items that serve business purposes. Just like with corporations and small businesses, the IRS also allows workers with home offices to deduct these expenses on their tax returns.

Utilities and Upkeep

There are a number of cyclical expenses that come with maintaining your workplace, including rent, utilities, infrastructure updates, repairs, and cleaning. Consistent maintenance is even more critical for warehouses and factories.

Marketing & Advertising

Certain businesses treat marketing and advertising as an afterthought, while others lean heavily on long-term campaigns. Either way, advertising should be included as an expense category, both in cases as simple as social media posts or as complex as business expo booths.

Research & Development

R&D refers to the actions companies take to innovate current products, develop new ideas, and stay on the forefront of their field. It’s a process that looks different for each organization, but usually brings its own business expenses.

Employee Hiring & Training

The business expenses accrued from hiring & onboarding employees can catch organizations by surprise; losing, replacing, and training a position may cost roughly half that position’s salary. Turnover is expensive, so it’s wise to keep your team happy (though that’s a conversation for another time).

This expense category also includes recurring training and education as individuals grow within your company, which is commonplace in fields like science/healthcare as well as in regards to OSHA guidelines.

Employee Salary & Benefits

Nowadays, paychecks are only one part of an employee’s compensation & taxable income. You have the typical benefits of health insurance and 401k plans, but perks can also extend to stock options, retirement plans, wellness programs, meals, daycare, and more.

Contractor Payments

Conversely, paychecks to agencies and self employed contractors typically make up the entirety of their compensation. This can apply to CPA services, hiring agencies, legal fees, freelancers, or anyone else that your business pays to do temporary work.

Insurance

There are many different kinds of insurance a company can carry for itself, such as property insurance, liability & worker’s compensation, and even cyber insurance. Make sure not to include employee health insurance in this group, as that relates more closely to benefits.

Vehicles/Depreciation

Another type of insurance is auto insurance, which is a significant factor for businesses with fleets of trucks or vans. One cost of vehicular ownership that’s more hidden than purchasing, insuring, and gas is depreciation.

It’s often said that your car loses value the second it leaves the dealer’s lot, and that’s true of a business’s vehicles as well. Tracking the gradual depreciation of trucks and vans is key to recognizing the true worth of your fleet and realizing when you might need reinforcements. This approach applies to more than just vehicles, as machinery, computers, and other types of office materials depreciate in a similar fashion.

The IRS also allows you to deduct vehicle ownership and gas expenses, as long as the vehicle is used strictly for business purposes.

Subscriptions & Licenses

Recurring payments like property taxes, licenses, and permits never go away, but they can be easy to overlook when categorizing expenses. Software subscriptions are just as important to monitor, as many companies lean on HR, design, and project management platforms.

Interest

Interest can come from many different sources, including property mortgages, business loans, lines of credit, business credit cards, or outstanding debt. Interest payments can get out of control rather quickly, so it’s vital to gain visibility into what’s coming and when.

Security

Some organizations are armed with heavy cybersecurity contracts, while others use high-tech systems on facility grounds. Whether you’re guarding against hacks & breaches or protecting proprietary technology, security is an expense category that’s probably important for your business.

Business Travel & Accommodations

Many organizations are regular attendees at national business conventions, which means booking flights & hotels for each employee that joins. Meals, rideshare bills, and seminars often contribute to the trip’s total travel expenses. Remember that meals for business purposes are 50% tax deductible according to the IRS, not 100%.

Banking Fees & Payment Processing

Finally, any company with multiple financial accounts and a consistent cash flow can expect to accrue lots of different bank fees & transaction charges. Wire transfer fees, international transaction fees, merchant service fees, and bank fees are some examples of small charges that attach themselves to payments of all kinds. For businesses looking to save on monthly account fees and wire transfers, the Slash Pro Plan may be your answer.

The standard in finance

Slash goes above with better controls, better rewards, and better support for your business.

Get Started

What is an Expense Approval Process, and How Does it Work?

While categorization and approval are usually treated as separate problems, they connect directly to each other. An expense approved with context attached is on the way to being categorized correctly, while one approved as a line on a statement has to get figured out later without much context.

A working approval process has five stages.

Submission (with context): The person spending the money explains what it was meant for. The earlier this context is given, the better.
Review against policy and budget: Someone checks the request against spending policy and the relevant budget before money moves, to make sure problems don’t crop up later.
Approval or rejection: A clear decision is made by the person with the authority to make it, along with the reasoning.
Documentation for reporting: The receipt, the business purpose, and the category should be captured together. For travel and meals, the IRS also expects you to substantiate the amount, date, place, and business purpose. If you don’t, you’ll likely lose the chance to deduct it as an expense.
Ongoing monitoring: It’s smart to review spending against limits and controls over time rather than only at approval, so you can notice patterns and recurring problems that would be hard to catch while looking at individual instances.

Slash can help speed this process up by automatically approving routine requests that meet predefined policies. Any requests that land above designated thresholds or require closer scrutiny are routed to the right people for human review, meaning your team can save time on approvals without overlooking the important ones.

Tips for Accurately Categorizing and Tracking Expenses

The main theme for accurate expense categorization is “be responsible”. If your team is diligent about documentation and consistency, you’ll be less likely to run into unexpected issues at the end of the month. Here are a few tips:

Write down your category definitions: A short document stating that design subscriptions go under software and freelance designers go under contractors helps eliminate judgment calls and ambiguity.
Keep the list short: It's tempting to create a category for everything from office supplies to rent, but a chart of accounts with sixty lines will probably get applied inconsistently because it’s impossible to remember all sixty. Fewer, broader categories with certain detailed subcategories are the right way to go.
Capture receipts immediately: The IRS generally doesn't require documentary evidence for travel and meal expenses under $75, but you’ll still have to substantiate them. Additionally, lodging requires a receipt at any amount. As a rule of thumb, take pictures of receipts when you can.
Give each vendor a dedicated card: Card-level separation makes categorization nearly automatic, since a card used only for advertising can only be spent on advertising. Since Slash users can issue unlimited virtual cards, you can customize as many spending categories as you want, each with their own permissions and ceilings.
Review quarterly: Categories can start to become less accurate as a business changes. A short review can catch the subscriptions you forgot about and the categories that have become more-or-less irrelevant.

Smarter Expense Categorization for Growing Businesses With Slash

Your expense tracking software should do more than keep an eye on expenditures. Our platform is built to both manage your transactions and the systems that work behind them.

Slash sorts expenses for you; after setting up your categories, all purchases and fees are displayed in the correct place in real time, keeping your reports easy, your accounting organized, and your expenses tax-compliant. Each transaction appears instantly on the dashboard, from inbound and outbound payments to employee purchases made with the Slash Visa® Platinum Card.

Most businesses that pick up expense tracking software have to add it to their pile of tools, which leads to issues later on. More apps and accounts create more disconnects and mistakes, making consistent, clean financial reports a challenge. This is why Slash centralizes corporate cards, bank accounts, multi-entity transactions, and automated expense categorization onto one financial platform.

You'll also get a clear view of what's deductible in the eyes of the IRS. Deductible business expenses and tax write offs are some of the biggest benefits to identifying business expense categories.

Along with solutions for expenses and deductions, Slash also offers:

Native cryptocurrency support: Send and receive USD-pegged stablecoins USDC and USDT across eight supported blockchains for faster, lower-cost global payments.⁴
Diverse payment rails: Slash supports a wide range of payment methods, including card spend, global ACH, international wire transfers to over 180 countries via SWIFT, and real-time domestic payments through RTP and FedNow.
Global USD: The Slash Global USD Account is designed as an alternative for foreign founders who want access to USD without forming a US entity.³ Balances are backed by Slash’s USDSL stablecoin, which is designed to maintain a one-to-one value with the US dollar.
Reimbursements: Instead of managing reimbursements across multiple tools, teams can submit, review, and approve reimbursements directly inside the Slash dashboard. Connect your bank account, upload your receipt, and let Slash capture the details.
AI-powered finance: Our platform comes with Twin, a built-in AI agent that can be prompted with natural language to complete complex tasks. Users can ask it to create cards, pay invoices, review your cash flow, and a lot more.

Apply in less than 10 minutes today

Join the 10,000+ businesses already using Slash.

FAQs

How do you categorize receipts for taxes for small businesses?

Match each receipt to the expense category it belongs to and record the business purpose alongside it, since the IRS wants to see the amount, date, place, and reason for the expense rather than just proof that money changed hands. Digital capture is a lot better than stuffing receipts in a drawer, whether it comes from your accounting system, an expense tool, or the Slash Mobile App.

What are the tax write-off categories?

Most categories in this article contain deductible expenses, including office supplies, advertising, rent, utilities, professional services, software, insurance, and business travel. The test isn't the category name, but whether the expense is ordinary and necessary for your trade or business under Section 162. Home office deductions vary by the work you do and the literal size of your home. Some deductions are partial rather than full, (e.g. business meals are generally limited to 50%). Because circumstances vary and the rules move, confirm your specific deductions with a tax professional.

What are operating expenses?

Operating expenses are the costs of running your business day to day, as opposed to the direct costs of producing what you sell and separate from non-operating items like interest. Rent, utilities, salaries, marketing, insurance, and professional fees are some common examples.