When you’re running a business, categorizing expenses can feel like just another bookkeeping chore. You might be thinking, Does it really matter if I put this under “Office Expenses” or “Software”? 

Short answer: Yes, it does.

Categorizing your expenses isn’t just about staying organized—it directly impacts your taxes, financial decisions, and even your ability to get funding. So, let’s break it down.

Why Categorizing Expenses Matters

Accurate Financial Reports – If your books are a mess, it’s hard to know if your business is actually profitable. Proper categories help you see where your money is going.

Tax Deductions – Some expenses are deductible, but only if they’re categorized correctly. (A dinner with a client? Deductible. That DoorDash order at 11 PM? Not so much.)

Audit Protection – If the IRS ever comes knocking, having clear expense categories makes your financials easier to defend.

Better Business Decisions – Want to cut costs? Raise prices? Knowing what you actually spend on marketing, payroll, or supplies helps you make smarter moves.

What Is Expense Categorization?

At its core, categorizing expenses means grouping similar business costs together so they’re easier to track. Instead of just dumping everything into “Miscellaneous” (please don’t do this!), you create clear categories that reflect how your business operates.

Expense Categories We Like

Every business is different, so your categories should match your needs. But here are some of our go-to categories for entrepreneurs:

Marketing & Advertising

Website hosting, branding, ads, social media management, and your Canva Pro subscription (even if you only use it for Instagram stories).

Software & Subscriptions

QuickBooks, Google Workspace, Zoom Pro, and that course you bought but haven’t watched yet.

Travel & Mileage

Flights, hotels, rental cars, and gas for business trips. If you drive for work, keep track of your mileage—it’s a tax deduction goldmine.

Meals & Entertainment

Business lunches, coffee meetings, and networking events. Just remember: Your solo Starbucks runs? Not deductible.

Home Office (if applicable)

If you work from home, you may be able to deduct a portion of your rent, utilities, and internet. But be careful—this category has IRS rules.

Professional Services

Accountants (hey, that’s us 👋), legal fees, business coaching, and contractors you hire.

Supplies & Materials

Everything from shipping boxes to client gifts to that overpriced planner you swear keeps you productive.

Payroll & Contractor Payments

If you pay employees or freelancers, this is where those costs go.

Inventory (if applicable)

For product-based businesses: raw materials, packaging, and stock you resell.

Going the extra mile

Ready to make your life even easier? As you categorize expenses, make a note of what was purchased. (QuickBooks makes this super easy) With just a simple note you can know when you see Starbucks $14, that is IS deductible because it was for a client meeting and not just because you had a treat yo self day.  This will make your life ssoooooo much easier come tax season. 

The Bottom Line

Your categories should work for you, not against you. Keep them simple, consistent, and aligned with tax rules. And if you ever feel lost? That’s what we’re here for.

In fact, we even have a WHOLE course about how to take advantage of accounting software (specifically QBO). We break it all down—how to set it up, what actually matters (and what doesn’t), and how to use it to make smarter business decisions without getting lost in the numbers. No jargon, no fluff—just everything you need to finally feel in control of your finances. Check it out here: pattonaccounting.net/qbo.