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Small Business Tax Categories Explained: A Plain-English Guide

One of the most confusing parts of running a small business is figuring out where each expense goes at tax time. Is that lumber purchase "Materials" or "Supplies"? Is your phone bill an "Office Expense" or a "Utility"? And does it even matter?

Short answer: yes, it matters — the right categories help you maximize deductions and keep the IRS happy. But it doesn't have to be complicated. Here's a plain-English guide to the most common categories.

Disclaimer: This is general guidance, not tax advice. Every business is different. Consult your accountant or tax professional for advice specific to your situation.

Cost of Goods Sold (COGS)

If you buy materials that go directly into a product or service you deliver to a client, that's COGS. This is one of the most valuable categories because it reduces your gross income before other deductions apply.

  • Construction: lumber, concrete, drywall, fixtures bought for a specific build
  • Retail: inventory purchased for resale
  • Food service: ingredients and packaging
  • Freelance/creative: materials for a client deliverable (printing costs, stock photos licensed for a project)

Rule of thumb: If the expense is directly tied to a specific client job or product, it's probably COGS.

Supplies

Supplies are things you use in your business that aren't tied to a specific client or product. They get consumed relatively quickly and aren't major purchases.

  • Office supplies (paper, pens, toner)
  • Cleaning supplies
  • Small tools under $2,500 (drill bits, saw blades, sandpaper)
  • Shipping materials (boxes, tape, labels)

COGS vs. Supplies: Sandpaper you use across many jobs → Supplies. Specialty hardwood bought for one client's table → COGS.

Vehicle Expenses

If you drive for business, you can deduct either actual expenses (gas, maintenance, insurance) or the standard mileage rate. You can't mix and match — pick one method and stick with it for the year.

  • Gas and fuel
  • Oil changes and maintenance
  • Lease payments (business portion)
  • Parking and tolls (deductible either way)

Meals

Business meals are generally 50% deductible. The meal must be directly related to business — meeting a client, traveling for work, etc. Keep the receipt and note who you met with and what was discussed.

Office Expenses

Day-to-day costs of running your workspace:

  • Software subscriptions (including bookkeeping tools)
  • Internet and phone (business portion)
  • Postage
  • Small office equipment

Rent / Lease

If you rent a workspace, shop, or storage unit for business, the full amount is deductible. If you work from home, look into the home office deduction — it's based on the percentage of your home used exclusively for business.

Insurance

Business insurance premiums are deductible:

  • General liability
  • Professional liability / E&O
  • Workers' compensation
  • Commercial auto insurance
  • Business property insurance

Professional Services

Fees paid to professionals who help run your business:

  • Accountant / CPA fees
  • Legal fees
  • Bookkeeping services
  • Consulting fees

Advertising & Marketing

Anything you spend to promote your business:

  • Website hosting and domain
  • Social media ads
  • Business cards and flyers
  • Google Ads, Facebook Ads
  • Sponsorships

Equipment & Depreciation

Major purchases over $2,500 that last more than a year are typically depreciated over time rather than deducted all at once. However, Section 179 lets many small businesses deduct the full cost in the year of purchase.

  • Computers and monitors
  • Power tools and machinery
  • Furniture
  • Vehicles (business use portion)

Talk to your accountant about whether to depreciate or take the Section 179 deduction — it depends on your income and tax situation.

Utilities

  • Electricity, gas, water (for business premises)
  • Trash and recycling
  • Internet (if separate business line)

Travel

If you travel for business purposes:

  • Airfare, train, bus
  • Hotels
  • Rental cars
  • Tips and baggage fees

The travel must be primarily for business. Keep detailed records of the business purpose.

Taxes & Licenses

  • Business licenses and permits
  • State and local business taxes
  • Employer payroll taxes

When in Doubt

If you're not sure where an expense belongs, here's what to do:

  • Keep the receipt. Always. A categorized receipt is infinitely better than a missing one.
  • Pick the closest category. It doesn't have to be perfect — your accountant can reclassify if needed.
  • Ask your accountant. A 5-minute question now can save hours of cleanup later.
  • Be consistent. If you put gas at "Vehicle Expenses" this month, don't switch it to "Travel" next month.

The goal isn't perfection — it's organization. Get your receipts into the system, categorize your best guess, and let your accountant fine-tune it. That's exactly what tools like BuKeep are designed for.

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