We’ve previously written on How to Categorize Business Expenses and wanted to further expand on the topic. The IRS does not make it easy, but a good bookkeeper can help you make sense of it all. Here are 5 business expenses you are not categorizing correctly.

1. Software Vs. Purpose of Software

Your business no doubt has a humungous number of software, apps, tools, and more that you use on a regular basis. However, you may not be able to categorize it the same way. For example, you most likely pay for an Operating System (OS) for your computers, laptops, and tablets. It is generally either a version of MS Windows (10, 11, etc.) or a version of MacOS (Tahoe, Sonoma, Big Sur, etc.). Whether it is a monthly or one-time payment, this will go under Other Expenses – Software.

This is typical for software you use to run your business. This may include items such as scheduling software, budgeting, online meeting/collaboration, and many others. But some software will be categorized differently such as:

  • Paid advertising such as Google AdWords, Facebook Ads, and similar.
  • Email and newsletter marketing tools such as MailChimp, Constant Contact, and similar.
  • Your website and social media costs including domain, hosting, and CMS.
  • Analytics tools such as SEM Rush, MOZ, and others.
  • CRM funnels such as Salesforce.
  • and many other specialty tools.

Did you know? Out of the over 31 million non-farm sole proprietorship returns filed, they deducted over 2 billion business receipts? This was in 2023, the latest year the data was available. Source: IRS SOI Tax Stats

2. Business Meals

We all have to eat when we work, but we don’t always get to deduct it. However, there are cases when meals can be deducted anywhere from 50% to 100%. For example, the 50% deduction is generally done when you are treating a client or other person to a meal or qualifying entertainment. So if the two of you spend $100 on a meal, you get to deduct 50% of this. Be sure to keep the client’s name and purpose of meeting in your records.

The IRS allows other methods for you to get the 100% deduction. These are generally meals and qualifying entertainment for “the office.” This can include holiday parties, picnics, office snacks up to a certain amount, late night meals, emergency meeting meals, and even for team building events. Be sure to have your bookkeeper help you categorize these correctly.

3. Contract Worker vs Part Time Worker

This can be a confusing category because there is a lot of gray area in between. For example, part time workers may not have a set schedule, but a contractor may do so. However, you should consider anyone who works directly under you as part of your organization a part time employee who is deducted on Line 26. A contractor will generally have their own corporation and offer you an EIN rather than an SSN. In this case, you categorize them under Line 11 and send them a 1099-NEC if you pay them over $600 per year.

4. Business Expenses Associated with your Home Office

We all have a home office whether it is a desk on the side of the kitchen or a dedicated room. The desk in the kitchen may not be worth deducting as it is only a couple square feet and may be used for other purposes as well. However, a dedicated office in your home is a space that is used only for business and may be deducted. It can be done at $5 per square foot of the office or as a percentage of the entire square footage of the home. Your bookkeeper can help you decide which is more beneficial.

5. Travel and Car Business Expenses

There are two ways to categorize expenses associated with driving your personal car. Many of our clients simply keep track of how many business miles they drive and deduct that. This works for some, but many find success with the following method: Keep track of all your vehicle’s expenses including gas, oil changes, repairs, registration, inspections, and more. Deduct the percentage you use the car for business. So if you paid $5,000 for all your vehicle expenses and used it for business 10% of the time, you get to deduct $500. At a current deduction of $0.70 per mile, you would have to drive 714 business miles to get the same.

More on 5 business Expenses you are not categorizing Correctly in Houston

Does your business need help categorizing its business expenses and is located in Houston? Feel free to contact our office to get a professional’s help on what can be deducted and how to categorize it correctly.