{"id":5671,"date":"2025-11-28T12:22:50","date_gmt":"2025-11-28T11:22:50","guid":{"rendered":"https:\/\/useme.com\/en\/blog\/?p=5671"},"modified":"2025-11-28T14:12:31","modified_gmt":"2025-11-28T13:12:31","slug":"business-expense-categories","status":"publish","type":"post","link":"https:\/\/useme.com\/en\/blog\/business-expense-categories\/","title":{"rendered":"Business expense categories: what every US entrepreneur should know in 2026"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_79_2 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title ez-toc-toggle\" style=\"cursor:pointer\">Table of contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 eztoc-toggle-hide-by-default' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/useme.com\/en\/blog\/business-expense-categories\/#What_is_a_tax-deductible_business_expense\" >What is a tax-deductible business expense?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/useme.com\/en\/blog\/business-expense-categories\/#Why_categorize_your_business_expenses\" >Why categorize your business expenses?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/useme.com\/en\/blog\/business-expense-categories\/#How_the_IRS_categorizes_business_expenses\" >How the IRS categorizes business expenses<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/useme.com\/en\/blog\/business-expense-categories\/#Major_business_expense_categories_every_US_entrepreneur_should_know\" >Major business expense categories every US entrepreneur should know<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/useme.com\/en\/blog\/business-expense-categories\/#Working_with_freelancers_and_independent_contractors\" >Working with freelancers and independent contractors<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/useme.com\/en\/blog\/business-expense-categories\/#Working_with_freelancers_US_and_international_compliance\" >Working with freelancers: US and international compliance<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/useme.com\/en\/blog\/business-expense-categories\/#Best_practices_for_categorizing_and_tracking_expenses\" >Best practices for categorizing and tracking expenses<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/useme.com\/en\/blog\/business-expense-categories\/#FAQ_business_expense_categories\" >FAQ: business expense categories<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/useme.com\/en\/blog\/business-expense-categories\/#Conclusion_take_control_of_your_finances\" >Conclusion: take control of your finances<\/a><\/li><\/ul><\/nav><\/div>\n<p><span style=\"font-weight: 400;\">The IRS requires businesses to classify costs. Doing this correctly can make a huge difference come tax season.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This applies whether you&#8217;re a growing startup, a mid-sized company, or a business that relies on independent contractors and freelancers. <\/span><b>Knowing how to categorize business expenses can significantly lower your tax liability.<\/b><\/p>\n<p><span style=\"font-weight: 400;\">In this guide, we&#8217;ll focus on the essential business expense categories every US entrepreneur should know. We&#8217;ll also cover special considerations for working with freelancers and independent contractors \u2013 both domestic and international. Let&#8217;s get started!<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_is_a_tax-deductible_business_expense\"><\/span><b>What is a tax-deductible business expense?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">A tax-deductible business expense is <\/span><b>a cost that reduces your taxable income<\/b><span style=\"font-weight: 400;\">. According to the IRS, these expenses must be both <\/span><b>ordinary <\/b><span style=\"font-weight: 400;\">(everyday in your trade or business) and <\/span><b>necessary<\/b><span style=\"font-weight: 400;\"> (appropriate for your business operations to function).<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For example:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A consulting firm can deduct rent for its office, internet service, and employee salaries.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A bakery can deduct flour, packaging, and wages for staff.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A marketing agency can deduct software subscriptions, ad spend, and fees for freelance designers.<\/span><\/li>\n<\/ul>\n<p><b>Not every cost is deductible in the same way<\/b><span style=\"font-weight: 400;\">. Some, like rent or utilities, are written off in the year you pay them. Others, like equipment or vehicles, may need to be spread out over several years through depreciation. <\/span><b>Understanding this difference is crucial for accurate financial reporting.<\/b><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Why_categorize_your_business_expenses\"><\/span><b>Why categorize your business expenses?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Now, you may say, &#8216;Ok, I get that there are different deductible expenses but what&#8217;s the point of categorizing them?&#8217;. Well, think of business expense categories as labels that keep your finances organized. Instead of lumping all common business expenses together, you assign each payment to a clear group. This helps you:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Maximize deductions <\/b><span style=\"font-weight: 400;\">\u2013 you won&#8217;t leave money on the table.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Stay compliant<\/b><span style=\"font-weight: 400;\"> \u2013 categories align with IRS expectations, making your records audit-ready.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Gain insights<\/b><span style=\"font-weight: 400;\"> \u2013 you can easily see where money is going and adjust budgets accordingly.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Simplify reporting<\/b><span style=\"font-weight: 400;\"> \u2013 lenders, investors, or partners can quickly review well-structured financial records.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">See? Without categories, expenses blur together. This makes it difficult to spot tax deductible items or prepare accurate reports. With categories, your bookkeeping becomes more reliable and much less stressful when tax season arrives.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_the_IRS_categorizes_business_expenses\"><\/span><b>How the IRS categorizes business expenses<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">To be eligible for a deduction, a cost must be an ordinary and necessary business expense. Even if you&#8217;re not profitable in a given year, the intent to operate for profit is important. Otherwise, the IRS may classify your activity as a hobby. This changes how expenses are treated.<\/span><\/p>\n<p><b>Understanding how expenses behave is also crucial <\/b><span style=\"font-weight: 400;\">\u2013 they can be <\/span><b>fixed expenses<\/b><span style=\"font-weight: 400;\"> (remain consistent regardless of sales volume), <\/span><b>variable expenses <\/b><span style=\"font-weight: 400;\">(fluctuate in direct proportion to production or sales level), or <\/span><b>periodic expenses <\/b><span style=\"font-weight: 400;\">(occur sporadically but predictably, like annual license renewals).<\/span><\/p>\n<div class=\"responsive-table-wrapper\">\n<table class=\"responsive-table\">\n<tbody>\n<tr>\n<td><b>Category<\/b><\/td>\n<td><b>Examples<\/b><\/td>\n<td><b>Deduction Method<\/b><\/td>\n<\/tr>\n<tr>\n<td><b>Capital expenses<\/b><\/td>\n<td><span style=\"font-weight: 400;\">Machinery, vehicles, property<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Depreciated over time<\/span><\/td>\n<\/tr>\n<tr>\n<td><b>Cost of goods sold (COGS)<\/b><\/td>\n<td><span style=\"font-weight: 400;\">Raw materials, direct labor, packaging<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Deducted when sold<\/span><\/td>\n<\/tr>\n<tr>\n<td><b>Operating expenses (OpEx)<\/b><\/td>\n<td><span style=\"font-weight: 400;\">Rent, utilities, salaries, advertising<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Deducted in the year paid<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<div>\n<p><span style=\"font-weight: 400;\">The IRS separates business expenses into three primary categories:<\/span><\/p>\n<h3><b>1. Capital expenses<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">These are<\/span><b> long-term investments in your business property<\/b><span style=\"font-weight: 400;\">, 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.<\/span><\/p>\n<h3><b>2. Cost of goods sold (COGS)<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">If you sell products, the direct costs of producing them fall into this category. Cost of goods sold (COGS) encompasses <\/span><b>direct costs of producing goods or services sold by a company<\/b><span style=\"font-weight: 400;\">. 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.<\/span><\/p>\n<h3><b>3. Operating expenses (OpEx)<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">These are your <\/span><b>day-to-day operational costs of running the business.<\/b><span style=\"font-weight: 400;\"> Operating expenses (OpEx) include salaries, rent, utilities, office supplies, advertising, marketing expenses, and contractor payments. Most businesses spend the majority of their budget here.<\/span><\/p>\n<p><b>Non-operating expenses<\/b><span style=\"font-weight: 400;\">, such as interest on loans not directly related to core business activities, fall into a separate category for accounting purposes.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Major_business_expense_categories_every_US_entrepreneur_should_know\"><\/span><b>Major business expense categories every US entrepreneur should know<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">The IRS allows businesses to deduct business expenses for many of their ordinary and necessary costs. But only if they&#8217;re tracked under the right category. This organization not only maximizes tax deductions but also makes your records easier to review if you&#8217;re audited.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Let&#8217;s go through major business expense categories according to IRS:<\/span><\/p>\n<h3><b>A. Occupancy and office costs<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Rent or mortgage interest<\/b><span style=\"font-weight: 400;\"> \u2013 for office space, warehouses, or retail locations. Mortgage interest is a significant deductible business expense for property owners.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Home office deduction<\/b><span style=\"font-weight: 400;\"> \u2013 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.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Utilities<\/b><span style=\"font-weight: 400;\"> \u2013 electricity, internet service, water, sewage, trash, and phone.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Office supplies and equipment<\/b><span style=\"font-weight: 400;\"> \u2013 pens, paper, printer ink, laptops, and printers. These office expenses are among the most common expense categories.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<h3><b>B. Employee and contractor costs<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Salaries, wages, and compensation<\/b><span style=\"font-weight: 400;\"> \u2013 including bonuses and commissions.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Independent contractor payments<\/b><span style=\"font-weight: 400;\"> \u2013 amounts paid to freelancers (e.g., designers, copywriters, IT support).<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Employee benefits<\/b><span style=\"font-weight: 400;\"> \u2013 health insurance, disability, and life insurance through employee benefit programs.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Retirement contributions<\/b><span style=\"font-weight: 400;\"> \u2013 employer contributions to 401(k)s, IRAs, or similar employee retirement plans.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Training and education<\/b><span style=\"font-weight: 400;\"> \u2013 workshops, seminars, continuing education costs for courses, and employee training costs for professional development that maintain or improve skills required for jobs.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">People are often a company&#8217;s largest expense. The IRS allows deductions for salaries, wages, bonuses, and commissions. However, they must be reasonable and directly tied to business services.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\ud83d\udca1 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 <\/span><a href=\"https:\/\/useme.com\/en\/blog\/1099-nec-form\/\"><span style=\"font-weight: 400;\">Form 1099-NEC<\/span><\/a><span style=\"font-weight: 400;\">.<\/span><a href=\"https:\/\/cta-eu1.hubspot.com\/web-interactives\/public\/v1\/track\/redirect?encryptedPayload=AVxigLLsrHXUb6ZNNOUG6LyQOmNUhxGchLmuBnp2xjVgm0rs%2Bvt%2BoYoQ098yYmjMkIHTgBve2FX9Mf3ZpTwpkHZgwfjZ4APhaP9ymMn4g6lpcIb85d0aP7shKdWBrib6HA%2FoI6BUMXAZn1X%2Fw4APEHG2pDYRw1%2BcxQDDK%2Bpx%2FOhgF4URi3sDW95K7hPKe3%2FBYBp%2BQdH8wfOIn46xFadZmr2TBRs%3D&amp;webInteractiveContentId=305294916850&amp;portalId=27198211\" target=\"_blank\" rel=\"noopener\"><br \/>\n<img decoding=\"async\" style=\"height: 100%; width: 100%; object-fit: fill;\" src=\"https:\/\/hubspot-no-cache-eu1-prod.s3.amazonaws.com\/cta\/default\/27198211\/interactive-305294916850.png\" alt=\"Simplify settlements with freelancers worldwide\" \/><\/a><\/p>\n<h4><b>Special tax credits for employee benefits<\/b><\/h4>\n<p><span style=\"font-weight: 400;\">Businesses may qualify for various tax credits related to employee benefits. The <\/span><b>work opportunity tax credit<\/b><span style=\"font-weight: 400;\"> (WOTC) provides incentives for hiring individuals from certain target groups. Additionally, <\/span><b>employee transportation benefits and certain retirement plans may qualify for federal tax credit opportunities<\/b><span style=\"font-weight: 400;\"> that reduce your overall tax burden.<\/span><\/p>\n<h3><b>C. Marketing and business development<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Advertising and marketing<\/b><span style=\"font-weight: 400;\"> \u2013 websites, billboards, social media ads, and PR campaigns.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Printing and postage<\/b><span style=\"font-weight: 400;\"> \u2013 brochures, business cards, and mailers.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Client gifts<\/b><span style=\"font-weight: 400;\"> \u2013 limited to $25 per recipient per year, with exceptions for small promotional items.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<h3><b>D. Travel, meals, and vehicles<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Business travel<\/b><span style=\"font-weight: 400;\"> \u2013 flights, hotels, taxis\/rideshares, and baggage fees.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Meals<\/b><span style=\"font-weight: 400;\"> \u2013 generally 50% deductible if tied to business meetings, travel, or events.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Business vehicle use<\/b><span style=\"font-weight: 400;\"> \u2013 standard mileage rate or actual expenses (fuel, maintenance, depreciation). Vehicle expenses can be fully or partially deductible based on their business use.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">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&#8217;re directly tied to business purposes.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<h3><b>E. Professional services and financial costs<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Legal and professional fees<\/b><span style=\"font-weight: 400;\"> \u2013 payments to CPAs, attorneys, and consultants.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Bank fees and loan interest<\/b><span style=\"font-weight: 400;\"> \u2013 credit card fees, overdraft fees, and loan interest on business loans.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Taxes and licenses<\/b><span style=\"font-weight: 400;\"> \u2013 payroll taxes, property taxes, business licenses, and permits.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Insurance<\/b><span style=\"font-weight: 400;\"> \u2013 general liability insurance, workers compensation insurance, malpractice, and property insurance. Business insurance costs are among the most usual business expenses.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<h4><b>Financial services and banking costs<\/b><\/h4>\n<p><span style=\"font-weight: 400;\">Modern businesses work with multiple financial institutions and often incur various credit and collection fees. <\/span><b>These costs, along with interest paid on business credit lines, represent common business expense categories that require careful tracking.<\/b><span style=\"font-weight: 400;\"> Some businesses also utilize courier services for document delivery, which falls under operational expenses.<\/span><\/p>\n<h3><b>F. Technology and subscriptions<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Software<\/b><span style=\"font-weight: 400;\"> \u2013 accounting software tools, project management, CRM, and SaaS platforms.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Website costs<\/b><span style=\"font-weight: 400;\"> \u2013 hosting, design, and domain registration.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Dues and subscriptions<\/b><span style=\"font-weight: 400;\"> \u2013 industry magazines and trade association memberships.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Gadgets<\/b><span style=\"font-weight: 400;\"> \u2013 phones, tablets, and computers.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Technology purchases, such as laptops or phones, are typically depreciated if they&#8217;re used for more than a year. (Depreciation is a method of deducting the cost of tangible assets over their useful life). However, under <\/span><a href=\"https:\/\/www.irs.gov\/faqs\/sale-or-trade-of-business-depreciation-rentals\/depreciation-recapture\/depreciation-recapture\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\">Section 179<\/span><\/a><span style=\"font-weight: 400;\">, many small businesses can deduct the full cost in the year of purchase.<\/span><\/p>\n<h3><b>G. Additional deductible expenses<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">Several other business expenses can provide tax benefits:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Charitable contributions<\/b><span style=\"font-weight: 400;\"> \u2013 donations made by businesses to qualified organizations may be deductible.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Moving expenses<\/b><span style=\"font-weight: 400;\"> \u2013 can be deductible if they&#8217;re necessary for business operations.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Equipment maintenance<\/b><span style=\"font-weight: 400;\"> \u2013 regular maintenance and repairs for business equipment.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Annual license renewals<\/b><span style=\"font-weight: 400;\"> \u2013 periodic expenses like professional licenses, permits, and certifications.<\/span><\/li>\n<\/ul>\n<h3><b>H. Startup and expansion costs<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Startup expenses<\/b><span style=\"font-weight: 400;\"> \u2013 up to $5,000 deductible immediately, with the rest amortized.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Organizational costs<\/b><span style=\"font-weight: 400;\"> \u2013 legal or accounting fees for forming a corporation or partnership.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Working_with_freelancers_and_independent_contractors\"><\/span><b>Working with freelancers and independent contractors<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<h3><b>Classifying contractors vs. employees<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">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. <\/span><a href=\"https:\/\/useme.com\/en\/blog\/employee-misclassification\/\"><span style=\"font-weight: 400;\">Worker misclassification<\/span><\/a><span style=\"font-weight: 400;\"> can lead to penalties, back taxes, and interest.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Employees<\/b><span style=\"font-weight: 400;\"> \u2013 reported on Form W-2; the employer pays payroll taxes and provides benefits.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Contractors<\/b><span style=\"font-weight: 400;\"> \u2013 reported on Form 1099-NEC if paid $600 or more in a year; no payroll taxes are withheld.<\/span><\/li>\n<\/ul>\n<h3><b>Deducting payments to contractors<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">Payments to independent contractors are fully <\/span><b>deductible<\/b><span style=\"font-weight: 400;\"> as a <\/span><b>business expense<\/b><span style=\"font-weight: 400;\">. They must be ordinary and necessary. These costs are usually categorized under:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Professional services<\/b><span style=\"font-weight: 400;\"> (graphic design, legal, marketing).<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Contract labor <\/b><span style=\"font-weight: 400;\">(temporary or project-based help).<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Specialized projects <\/b><span style=\"font-weight: 400;\">(software development, web design, consulting).<\/span><\/li>\n<\/ul>\n<h3><b>Reporting obligations<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u270d\ufe0f Learn more about taxes from our article <\/span><a href=\"https:\/\/useme.com\/en\/blog\/hiring-international-employees\/\"><span style=\"font-weight: 400;\">Hiring international employees: legal, tax, and global payroll tips for U.S. companies<\/span><\/a><span style=\"font-weight: 400;\">.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Working_with_freelancers_US_and_international_compliance\"><\/span><b>Working with freelancers: US and international compliance<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Can a US company include payments to freelancers in its business expenses? Yes, absolutely. As we already said in the <\/span><i><span style=\"font-weight: 400;\">Employee and contractor <\/span><\/i><span style=\"font-weight: 400;\">subsection, <\/span><b>the US company can include in its business expenses the payment made to a freelancer \u2013 both from the US and from outside the US<\/b><span style=\"font-weight: 400;\">. The requirement is that the work must be performed for the benefit of the business and properly documented.<\/span><\/p>\n<h3><b>Conditions that must be met:<\/b><\/h3>\n<ol>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>The service must be related to your company&#8217;s business<\/b><span style=\"font-weight: 400;\"> \u2013 e.g., graphic design, programming, copywriting, translation, etc.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>The payment must be documented<\/b><span style=\"font-weight: 400;\"> \u2013 e.g., invoice, contract, email confirmation of the order, proof of payment (e.g., transfer, PayPal).<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>For US freelancers <\/b><span style=\"font-weight: 400;\">\u2013 you must report this expense to the IRS via Form 1099-NEC if more than $600 was paid in a given tax year.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>For non-US freelancers<\/b><span style=\"font-weight: 400;\"> \u2013 you don&#8217;t need to issue a 1099, but it&#8217;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.<\/span><\/li>\n<\/ol>\n<h3 data-start=\"341\" data-end=\"400\"><strong data-start=\"347\" data-end=\"400\">Useme: Manage international freelancers with ease<\/strong><\/h3>\n<p data-start=\"402\" data-end=\"588\">Working with international freelancers can be tricky, especially when dealing with payments and tax paperwork. Platforms like <strong data-start=\"528\" data-end=\"537\">Useme<\/strong> make the process simpler for U.S. businesses by:<\/p>\n<ul data-start=\"590\" data-end=\"801\">\n<li data-start=\"590\" data-end=\"635\">\n<p data-start=\"592\" data-end=\"635\">Handling <a href=\"https:\/\/useme.com\/en\/blog\/how-to-pay-independent-contractors\/\" target=\"_blank\" rel=\"noopener\">payments to overseas contractors.<\/a><\/p>\n<\/li>\n<li data-start=\"636\" data-end=\"679\">\n<p data-start=\"638\" data-end=\"679\">Managing the required tax documentation.<\/p>\n<\/li>\n<li data-start=\"680\" data-end=\"737\">\n<p data-start=\"682\" data-end=\"737\">Providing ready-to-use invoice and contract templates.<\/p>\n<\/li>\n<li data-start=\"738\" data-end=\"801\">\n<p data-start=\"740\" data-end=\"801\">Ensuring compliance with U.S. and international regulations.<\/p>\n<\/li>\n<\/ul>\n<p data-start=\"803\" data-end=\"970\">With Useme, you spend less time on admin work and more on growing your business \u2013 while keeping all freelancer-related expenses properly documented.<a href=\"https:\/\/cta-eu1.hubspot.com\/web-interactives\/public\/v1\/track\/redirect?encryptedPayload=AVxigLJ7iuHnAUqMJViBPNRdwn5%2BASSmdlvgtstXUIwTIMXnXZ5N9L7DQv9PL3oJdqol%2BOLztyO4mdgGWxb9TCGjTuBAV5cTJbX2rELjW5%2FpBiPyfRYV5rSyVyNF5hVHjUNoKI5Zhj01nueaTa7q3kx6Bm46dJr2bpURQHhb2kjrWkHlhjWIQRtdMlzD0jtYiQ%3D%3D&amp;webInteractiveContentId=305294915808&amp;portalId=27198211\" target=\"_blank\" rel=\"noopener\"><br \/>\n<img decoding=\"async\" style=\"height: 100%; width: 100%; object-fit: fill;\" src=\"https:\/\/hubspot-no-cache-eu1-prod.s3.amazonaws.com\/cta\/default\/27198211\/interactive-305294915808.png\" alt=\"Baner CTA_txt 2 (4)\" \/><br \/>\n<\/a><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Best_practices_for_categorizing_and_tracking_expenses\"><\/span><b>Best practices for categorizing and tracking expenses<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Knowing what&#8217;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.<\/span><\/p>\n<h3><b>1. Use consistent categories<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">Set up common business expense categories that align with both IRS guidance and your business&#8217;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.<\/span><\/p>\n<h3><b>2. Leverage digital tools<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">Modern accounting software can automate much of the process and streamline tracking and categorizing business expenses:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Auto-categorization of recurring expenses.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Receipt uploads so you don&#8217;t lose documentation.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Bank integration for real-time tracking.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Integration with financial accounts for seamless data flow.<\/span><\/li>\n<\/ul>\n<h3><b>3. Keep documentation organized<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">The IRS requires proof of expenses. Always have:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Receipts or invoices.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Canceled checks or bank statements.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Contracts for large payments.<\/span><\/li>\n<\/ul>\n<h3><b>4. Reconcile regularly<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">Don&#8217;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.<\/span><\/p>\n<h3><b>5. Separate business and personal spending<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">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&#8217;t accidentally claim personal and business purposes expenses incorrectly. This makes record-keeping cleaner and reduces red flags during an IRS audit.<\/span><\/p>\n<h2 data-start=\"233\" data-end=\"275\"><span class=\"ez-toc-section\" id=\"FAQ_business_expense_categories\"><\/span><strong data-start=\"239\" data-end=\"275\">FAQ: business expense categories<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p data-start=\"277\" data-end=\"410\"><strong data-start=\"277\" data-end=\"321\">1. What are business expense categories?<\/strong><\/p>\n<p data-start=\"277\" data-end=\"410\">They\u2019re groups used to organize your business costs, like rent, supplies, or salaries.<\/p>\n<p data-start=\"412\" data-end=\"537\"><strong data-start=\"412\" data-end=\"448\">2. Why do they matter for taxes?<\/strong><\/p>\n<p data-start=\"412\" data-end=\"537\">Categorizing expenses correctly helps you claim all deductions and stay IRS-compliant.<\/p>\n<p data-start=\"539\" data-end=\"662\"><strong data-start=\"539\" data-end=\"583\">3. Can I deduct payments to freelancers?<\/strong><\/p>\n<p data-start=\"539\" data-end=\"662\">Yes, if the work supports your business and you have an invoice or contract.<\/p>\n<p data-start=\"664\" data-end=\"784\"><strong data-start=\"664\" data-end=\"700\">4. What about home office costs?<\/strong><\/p>\n<p data-start=\"664\" data-end=\"784\">You can deduct part of your rent or utilities if you use the space only for work.<\/p>\n<p data-start=\"786\" data-end=\"916\"><strong data-start=\"786\" data-end=\"824\">5. How do I track expenses easily?<\/strong><\/p>\n<p data-start=\"786\" data-end=\"916\">Use accounting software or apps that save receipts and categorize payments automatically.<\/p>\n<p data-start=\"918\" data-end=\"1040\"><strong data-start=\"918\" data-end=\"970\">6. What if I mix personal and business spending?<\/strong><\/p>\n<p data-start=\"918\" data-end=\"1040\">You could lose deductions \u2013 always use a separate business account.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Conclusion_take_control_of_your_finances\"><\/span><b>Conclusion: take control of your finances<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Understanding business expense categories isn&#8217;t just about staying compliant with the IRS. It&#8217;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:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Maximize tax deductions and reduce tax liability.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Reduce the risk of costly mistakes or audits.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Gain clear insights into spending habits and financial performance.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Whether you&#8217;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.<\/span><\/p>\n<p><b>\ud83d\udca1 Key takeaway: <\/b><span style=\"font-weight: 400;\">Treat expense management as an ongoing habit, not a once-a-year scramble. With the right system in place, you&#8217;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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Want to dive even deeper into the subject? Head straight to the source: <\/span><a href=\"https:\/\/www.irs.gov\/pub\/irs-pdf\/p535.pdf\" target=\"_blank\" rel=\"noopener\"><b>IRS Publication 535: Business Expenses<\/b><\/a><span style=\"font-weight: 400;\">.\u00a0<\/span><\/p>\n<hr \/>\n<p><em>This article is for informational purposes only and does not constitute legal or tax advice.<\/em><\/p>\n<\/div>\n<\/div>\n<div id=\"gtx-trans\" style=\"position: absolute; left: 407px; top: 130.594px;\">\n<div class=\"gtx-trans-icon\"><\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Running a business in the U.S. involves more than just making money. You need a smart approach to managing your finances. A key part of this is understanding and properly sorting your expenses.<\/p>\n","protected":false},"author":1,"featured_media":5673,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","content-type":"","inline_featured_image":false,"_lmt_disableupdate":"no","_lmt_disable":"","footnotes":""},"categories":[25],"tags":[],"class_list":["post-5671","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-for-employers"],"modified_by":"\u017baneta","_links":{"self":[{"href":"https:\/\/useme.com\/en\/blog\/wp-json\/wp\/v2\/posts\/5671","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/useme.com\/en\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/useme.com\/en\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/useme.com\/en\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/useme.com\/en\/blog\/wp-json\/wp\/v2\/comments?post=5671"}],"version-history":[{"count":6,"href":"https:\/\/useme.com\/en\/blog\/wp-json\/wp\/v2\/posts\/5671\/revisions"}],"predecessor-version":[{"id":5714,"href":"https:\/\/useme.com\/en\/blog\/wp-json\/wp\/v2\/posts\/5671\/revisions\/5714"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/useme.com\/en\/blog\/wp-json\/wp\/v2\/media\/5673"}],"wp:attachment":[{"href":"https:\/\/useme.com\/en\/blog\/wp-json\/wp\/v2\/media?parent=5671"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/useme.com\/en\/blog\/wp-json\/wp\/v2\/categories?post=5671"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/useme.com\/en\/blog\/wp-json\/wp\/v2\/tags?post=5671"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}