Business expense categories: what every US entrepreneur should know in 2026

The IRS separates business expenses into three primary categories:

1. Capital expenses

These are long-term investments in your business property, including buying machinery, office equipment, or company vehicles. Because these assets provide value over time, you typically deduct their cost gradually through depreciation instead of all at once.

2. Cost of goods sold (COGS)

If you sell products, the direct costs of producing them fall into this category. Cost of goods sold (COGS) encompasses direct costs of producing goods or services sold by a company. This includes raw materials, packaging, direct labor, and manufacturing overhead. Manufacturing companies rely heavily on proper cost-of-goods-sold tracking to understand their true profitability. Service-based companies may also have project-specific costs that fit here.

3. Operating expenses (OpEx)

These are your day-to-day operational costs of running the business. Operating expenses (OpEx) include salaries, rent, utilities, office supplies, advertising, marketing expenses, and contractor payments. Most businesses spend the majority of their budget here.

Non-operating expenses, such as interest on loans not directly related to core business activities, fall into a separate category for accounting purposes.

You need to correctly identify which expenses belong in each category. Misclassifying a capital purchase as an operating expense, for example, could lead to problems with your deductions. For this reason, many businesses consult a tax professional or use accounting software to ensure accurate expense categorization.

Major business expense categories every US entrepreneur should know

The IRS allows businesses to deduct business expenses for many of their ordinary and necessary costs. But only if they’re tracked under the right category. This organization not only maximizes tax deductions but also makes your records easier to review if you’re audited.

Let’s go through major business expense categories according to IRS:

A. Occupancy and office costs

• Rent or mortgage interest – for office space, warehouses, or retail locations. Mortgage interest is a significant deductible business expense for property owners. 
• Home office deduction – available if a portion of your home is used regularly and exclusively for business purposes. This can be fully or partially deductible based on business use.
• Utilities – electricity, internet service, water, sewage, trash, and phone.
• Office supplies and equipment – pens, paper, printer ink, laptops, and printers. These office expenses are among the most common expense categories.

Whether you rent an office, lease a co-working space, or work from home, the costs of keeping your business location running are deductible expenses. This includes rent or mortgage payments, utilities, and repairs. If you qualify for the home office deduction, a portion of your household bills can also be written off. But remember to calculate only the business portion of these costs.

B. Employee and contractor costs

• Salaries, wages, and compensation – including bonuses and commissions.
• Independent contractor payments – amounts paid to freelancers (e.g., designers, copywriters, IT support).
• Employee benefits – health insurance, disability, and life insurance through employee benefit programs.
• Retirement contributions – employer contributions to 401(k)s, IRAs, or similar employee retirement plans.
• Training and education – workshops, seminars, continuing education costs for courses, and employee training costs for professional development that maintain or improve skills required for jobs.

People are often a company’s largest expense. The IRS allows deductions for salaries, wages, bonuses, and commissions. However, they must be reasonable and directly tied to business services.

💡 For companies that rely on independent contractors or freelancers, payments are also tax-deductible. If you pay a contractor $600 or more in a year, you must issue Form 1099-NEC.

Special tax credits for employee benefits

Businesses may qualify for various tax credits related to employee benefits. The work opportunity tax credit (WOTC) provides incentives for hiring individuals from certain target groups. Additionally, employee transportation benefits and certain retirement plans may qualify for federal tax credit opportunities that reduce your overall tax burden.

C. Marketing and business development

• Advertising and marketing – websites, billboards, social media ads, and PR campaigns.
• Printing and postage – brochures, business cards, and mailers.
• Client gifts – limited to $25 per recipient per year, with exceptions for small promotional items.

Money spent to promote your business is generally deductible. This includes advertising campaigns, website design and hosting, social media ads, and even postage for mailers. These marketing expenses are essential for business operations and growth.

D. Travel, meals, and vehicles

• Business travel – flights, hotels, taxis/rideshares, and baggage fees.
• Meals – generally 50% deductible if tied to business meetings, travel, or events.
• Business vehicle use – standard mileage rate or actual expenses (fuel, maintenance, depreciation). Vehicle expenses can be fully or partially deductible based on their business use.

Business meals and travel expenses are significant deductible expenses when properly documented. Business travel is also deductible when it takes you away from your tax home overnight. In this case, eligible costs include airfare, hotel stays, rental cars, parking fees, and tolls. Business meals are typically 50% deductible, as long as they’re directly tied to business purposes.

Vehicle use can be deducted in two ways: either the standard mileage rate (set annually by the IRS) or actual costs like gas, maintenance, and depreciation. You must keep detailed mileage logs to support these deductions.

E. Professional services and financial costs

• Legal and professional fees – payments to CPAs, attorneys, and consultants.
• Bank fees and loan interest – credit card fees, overdraft fees, and loan interest on business loans. 
• Taxes and licenses – payroll taxes, property taxes, business licenses, and permits.
• Insurance – general liability insurance, workers compensation insurance, malpractice, and property insurance. Business insurance costs are among the most usual business expenses.

Most businesses rely on professional services. The IRS allows deductions for legal, accounting, and consulting fees paid. Bank charges, such as monthly service fees, overdraft fees, and loan interest, are also deductible but only if the business loans were used for business purposes.

Financial services and banking costs

Modern businesses work with multiple financial institutions and often incur various credit and collection fees. These costs, along with interest paid on business credit lines, represent common business expense categories that require careful tracking. Some businesses also utilize courier services for document delivery, which falls under operational expenses.

F. Technology and subscriptions

• Software – accounting software tools, project management, CRM, and SaaS platforms.
• Website costs – hosting, design, and domain registration.
• Dues and subscriptions – industry magazines and trade association memberships.
• Gadgets – phones, tablets, and computers.

Modern businesses often run on software expenses and digital tools. Deductible costs include SaaS subscriptions (accounting software platforms, CRMs), website hosting, domain names, and cloud storage.

Technology purchases, such as laptops or phones, are typically depreciated if they’re used for more than a year. (Depreciation is a method of deducting the cost of tangible assets over their useful life). However, under Section 179, many small businesses can deduct the full cost in the year of purchase.

G. Additional deductible expenses

Several other business expenses can provide tax benefits:

• Charitable contributions – donations made by businesses to qualified organizations may be deductible.
• Moving expenses – can be deductible if they’re necessary for business operations.
• Equipment maintenance – regular maintenance and repairs for business equipment.
• Annual license renewals – periodic expenses like professional licenses, permits, and certifications.

H. Startup and expansion costs

• Startup expenses – up to $5,000 deductible immediately, with the rest amortized. 
• Organizational costs – legal or accounting fees for forming a corporation or partnership.

New businesses can deduct up to $5,000 of business startup costs in their first year. The remainder is amortized over 15 years. These costs may include legal fees for forming an LLC, market research, or initial advertising campaigns. Understanding organizational costs is crucial for new business owners seeking to maximize their initial tax deductions.

Working with freelancers and independent contractors

Hiring freelancers and independent contractors is a popular strategy for US businesses. It offers flexibility and access to specialized skills. From a tax perspective, this has important implications for both deductions and IRS compliance.

Classifying contractors vs. employees

The IRS is strict about worker classification. If you control how, when, and where a worker performs services, that person is likely an employee, not a contractor. Worker misclassification can lead to penalties, back taxes, and interest.

• Employees – reported on Form W-2; the employer pays payroll taxes and provides benefits.
• Contractors – reported on Form 1099-NEC if paid $600 or more in a year; no payroll taxes are withheld.

Deducting payments to contractors

Payments to independent contractors are fully deductible as a business expense. They must be ordinary and necessary. These costs are usually categorized under:

• Professional services (graphic design, legal, marketing).
• Contract labor (temporary or project-based help).
• Specialized projects (software development, web design, consulting).

Reporting obligations

When you pay a contractor $600 or more during the year, you must issue Form 1099-NEC by January 31 of the following year. To do this, you should collect a Form W-9 from every contractor you hire. This provides their legal name and taxpayer identification number (TIN). Failing to issue 1099s can result in IRS penalties.

✍️ Learn more about taxes from our article Hiring international employees: legal, tax, and global payroll tips for U.S. companies.

Working with freelancers: US and international compliance

Can a US company include payments to freelancers in its business expenses? Yes, absolutely. As we already said in the Employee and contractor subsection, the US company can include in its business expenses the payment made to a freelancer – both from the US and from outside the US. The requirement is that the work must be performed for the benefit of the business and properly documented.

Conditions that must be met:

1. The service must be related to your company’s business – e.g., graphic design, programming, copywriting, translation, etc.
2. The payment must be documented – e.g., invoice, contract, email confirmation of the order, proof of payment (e.g., transfer, PayPal).
3. For US freelancers – you must report this expense to the IRS via Form 1099-NEC if more than $600 was paid in a given tax year.
4. For non-US freelancers – you don’t need to issue a 1099, but it’s helpful to have a W-8BEN form (completed by the foreign contractor). This confirms their non-resident status and allows the US company to justify the lack of withholding tax.

Useme: Manage international freelancers with ease

Working with international freelancers can be tricky, especially when dealing with payments and tax paperwork. Platforms like Useme make the process simpler for U.S. businesses by:

• Handling payments to overseas contractors.

• Managing the required tax documentation.

• Providing ready-to-use invoice and contract templates.

• Ensuring compliance with U.S. and international regulations.

With Useme, you spend less time on admin work and more on growing your business – while keeping all freelancer-related expenses properly documented.

Best practices for categorizing and tracking expenses

Knowing what’s deductible is only half the battle. To actually benefit from tax savings, you need a reliable system to categorize expenses and track them throughout the year. Good habits prevent mistakes, reduce audit risk, and save you time during tax filing.

1. Use consistent categories

Set up common business expense categories that align with both IRS guidance and your business’s spending. Use a structured system from the start that reflects your financial performance needs. Businesses can categorize expenses based on their specific industry needs to accurately reflect common costs in their sector.

2. Leverage digital tools

Modern accounting software can automate much of the process and streamline tracking and categorizing business expenses:

• Auto-categorization of recurring expenses.
• Receipt uploads so you don’t lose documentation.
• Bank integration for real-time tracking.
• Integration with financial accounts for seamless data flow.

3. Keep documentation organized

The IRS requires proof of expenses. Always have:

• Receipts or invoices.
• Canceled checks or bank statements.
• Contracts for large payments.

4. Reconcile regularly

Don’t wait until tax season to sort expenses. Review accounts monthly or quarterly to catch miscategorized items and flag missing receipts early. This regular review helps maintain accurate expense categorization throughout the year.

5. Separate business and personal spending

Mixing personal expenses and business transactions is a common mistake. Use a dedicated business bank account and credit card. This separation is crucial for maintaining clean records. It ensures you don’t accidentally claim personal and business purposes expenses incorrectly. This makes record-keeping cleaner and reduces red flags during an IRS audit.

FAQ: business expense categories

1. What are business expense categories?

They’re groups used to organize your business costs, like rent, supplies, or salaries.

2. Why do they matter for taxes?

Categorizing expenses correctly helps you claim all deductions and stay IRS-compliant.

3. Can I deduct payments to freelancers?

Yes, if the work supports your business and you have an invoice or contract.

4. What about home office costs?

You can deduct part of your rent or utilities if you use the space only for work.

5. How do I track expenses easily?

Use accounting software or apps that save receipts and categorize payments automatically.

6. What if I mix personal and business spending?

You could lose deductions – always use a separate business account.

Conclusion: take control of your finances

Understanding business expense categories isn’t just about staying compliant with the IRS. It’s about making smarter financial decisions. By knowing which expenses are tax-deductible, organizing them into clear categories, and tracking them consistently, US businesses can:

• Maximize tax deductions and reduce tax liability.
• Reduce the risk of costly mistakes or audits.
• Gain clear insights into spending habits and financial performance.

Whether you’re covering payroll, paying freelancers, or investing in business property, the key is to ensure every expense is both ordinary and necessary, as defined by the IRS. From there, maintaining organized records and using consistent expense categories will make tax filing far less stressful.

💡 Key takeaway: Treat expense management as an ongoing habit, not a once-a-year scramble. With the right system in place, you’ll not only simplify tax preparation but also strengthen the financial foundation of your business. Proper business expense categorization supported by reliable accounting software ensures you capture all deductible business expenses while maintaining compliance with IRS requirements.

Want to dive even deeper into the subject? Head straight to the source: IRS Publication 535: Business Expenses. 

This article is for informational purposes only and does not constitute legal or tax advice.