All companies incur expenses in the course of doing business. Some of the usual business expenses are cost of goods and services, rent, employee salaries, and utilities. Organising expenses into categories is an important business function because it provides clarity on how a business spends, aids budgeting, and enhances decision-making. It also makes tax season less stressful as a lot of business spend is tax deductible and proper categorisation contributes to significant tax savings.
In this article, we explore what qualifies as tax deductible expenses and learn how to categorise expenses the right way. Also included is a list of nine common business expenses categories.
Introduction to business expenses
Business expenses are the costs incurred to generate business income. They are deducted from revenue to determine a company's taxable income.
To be eligible to be tax deductible, business expenses must be 'ordinary' and 'necessary'. An ordinary expense means it is common while a necessary expense is one that's essential to operating a business. Not all business expenses are tax-deductible, though. Under the Inland Revenue Authority of Singapore (IRAS) guidelines, personal expenses, money spent on entertaining clients, fines resulting from legal violations, start-up expenses, loan repayments, and more don't qualify for deductions.
A proper understanding of essential business expense categories is crucial for monitoring expenses, identifying areas where savings can be made, and maximising business tax deductions.
These days, there are sophisticated accounting software and expense management software that ease the process of categorising expenses, tracking spend, and identifying deductible expenses.
Types of business expenses
Business expenses are broadly classified as:
Fixed expenses
Fixed expenses stay the same over several reporting periods. Examples include rent and interest payments.
Variable expenses
Variable expenses change over time, such as wages, utility (water, power) bills.
Periodic expenses
So called because they occur occasionally, such as bonuses and maintenance expenses.
Direct expenses
These cover costs that go directly into producing goods and services, such as raw material and labour.
Indirect expenses
These aren't directly linked to the production of goods/services but are necessary for overall business operation (rent, utilities).
9 common business expense categories
Expense categories are a systematic method of grouping similar costs. They serve as a framework for organising, tracking, and managing business spend. When done right, they provide valuable insights that strengthen decision-making and resource allocation.
There is no one way of categorising business expenses. Grouping expenses based on the business activities they are related to is fairly common. Here's a list:
1. Operational expenses
Expenses incurred through normal business operations are called operational expenses. One of the most essential business expense categories, this spend category is absolutely necessary for keeping the business running smoothly.
Common examples of operating expenses include rent or mortgage payments, utilities, office supplies, employee salaries, equipment, and inventory costs.
Plant and equipment maintenance and repair fees also come under operating expenses as they are essential to day-to-day operations. Similarly, subscription fees for software, cloud storage, and other business-related services are covered.
These qualify as deductible business expenses as long as they are an ordinary and necessary expense.
2. Employee-related expenses
There are a lot of workforce-related expenses, such as salaries, bonuses, commissions, and employee training costs.
Most businesses run employee benefit programmes offering perks like life insurance, healthcare, childcare, retirement benefits, and stock options, all of which are eligible for tax deductions.
Another employee-related business expense includes workers' compensation insurance, which compensates employees who fall ill or are injured on the job. It covers hospitalisation and treatment costs, disability pay, and lost wages. In Singapore, it is called Worker Injury Compensation Insurance and is a mandatory provision for certain groups of workers, including those who perform manual labour.
3. Marketing and advertising expenses
This category covers costs incurred on promoting the business' products and services. Billboards, hoardings, flyers, ads for social media, television and print, and brochures are some examples. Also included are fees paid to advertising and marketing firms to produce the promotional material. These, too, are tax-deductible business expenses.
4. Financial expenses
Financial expenses refer to the costs associated with funding a business. Bank fees – such as monthly maintenance charges, overdraft fees, wire transfer fees, transaction charges – are a type of financial expense. So is interest paid on a loan or ongoing credit line as well as mortgage interest.
Bank fees associated with business accounts and business-only credit cards are deductible expenses.
Business insurance expenses also come under financial expenses, but deserve their own category (see below).
5. Insurance expenses
Businesses rely on insurance plans – such as property insurance, general liability insurance, and malpractice insurance – to cushion them from unforeseen losses and risks. Business insurance premiums are a major subset of tax-deductible business expenses.
Other business-related insurance plans include:
- Business Interruption Insurance, also called Business Continuity Insurance, which covers income loss from disruptions to business as a result of fires, natural disasters, and cyber attacks.
- Employee-related insurance plans, including the previously mentioned Workers' Compensation Insurance and employee health insurance.
- Cyber liability insurance and data breach insurance, both of which cover revenue loss stemming from data breaches. Cyber liability insurance also covers fines and legal fees resulting from the data breach.
6. Cost of goods sold (COGS)
This covers all expenses directly associated with producing the goods that a company sells , such as material, labour, storage, and freight costs. Indirect expenses such as rent, advertising, and distribution are excluded. Cost of goods sold is better known as an accounting term and profitability metric, but it counts as a business expense category and is recorded as such on the income statement. It is also a deductible expense that brings down a company's tax liability.
7. Selling, General, and Administrative (SG&A) expenses
This business expense category covers what a company spends on promoting, selling, and delivering its products/services and managing its daily operations. It excludes costs directly associated with producing the goods/services (which is separately grouped as COGS) as well as R&D. Rent, wages, marketing and advertising costs, and distribution charges come under SG&A expenses. As they are considered an ordinary and necessary expense, SG&A is a tax deductible expense category.
8. Depreciation
Depreciation is a non-cash expense assigned to the loss in value of a fixed asset (machinery, buildings, furniture, vehicles, etc) due to wear and tear from usage and the passage of time. While depreciation is not tax deductible in Singapore, businesses can instead claim capital allowance on qualifying fixed assets.
9. Capital expenses
Also called capital expenditure or capex, this is what a business spends on long-term assets (plants, equipment, technology) to fuel growth and improve efficiency. Examples include money spent on acquiring, upgrading, and maintaining these assets. Despite being an expense incurred for business purposes, capex is considered more of an asset that increases the value of the business – and recorded as such on the balance sheet – rather than an actual business expense.
Business expense categories and expense management
Expense management is the process of tracking, analysing, and controlling business expenses. But it goes beyond keeping tabs on how much your employees spent on business travel, renting out an office space, or as fees paid for professional services. It includes creating successful spending strategies that ensure every penny spent is accounted for and that it aligns with organisational goals and complies with tax regulations. Smart expense management allows businesses to know when to cut back, where to invest, and where to deploy resources.
Creating correct business expense categories is essential in spend management because the clarity this brings allows companies to eliminate waste and cut down on unnecessary spend. They also get to focus on the more important task of growing the business rather than get bogged down by administrative processes.
Spend management requires regular review and reconciliation of a company's financial accounts and bank statements. A manual process is both time-consuming and error-prone. Using expense management software eliminates most of these challenges. It automates receipt generation, tracking, and reconciliation, and puts them all on a centralised database. It automates approvals, ensures in-policy spending, and streamlines reimbursements by integrating with employees' business-only credit cards. In-built expense reporting tools help identify tax deductions and tax benefits, which makes tax filing less painful.
Business expense categories and tax deductions
A proper understanding of business expense categories is needed to identify expenses that are tax deductible, which helps companies increase tax savings, lower taxable income, and improve cash flow.
Tax regulations and laws differ from region to region. Businesses, especially those that trade across international borders, must be familiar with region-specific laws in order to remain compliant and avoid penalties and legal trouble. Furthermore, being conversant with the rules will help them take advantage of the business tax deductions, credits, and incentives they are eligible for. For instance, country-specific federal tax credits help reduce business taxes owed to federal governments. The New Markets Tax Credit is one such federal tax credit established by the US government to encourage investment in low-income communities. The Work Opportunity Tax Credit, which urges US employers to hire individuals from certain marginalised groups, is another. Different countries have their own versions of such programmes.
As mentioned above, not all business expenses are tax deductible and differentiating between the two can be confusing and time-consuming. But not if you use spend management software. By tracking and categorising business expenses efficiently, these solutions make it quick and simple to determine the business expense categories that are tax deductible. By making tech tools an integral part of their spend management and consulting with tax professionals, businesses need no longer fear tax time.
Business expenses: What's tax deductible and what's not
Try Aspire expense management
Automating, tracking, and analysing business expenses is a breeze with Aspire's expense management platform. Here are some of its top features that have won the hearts of our clients:
- Real-time monitoring across cards and claims
- In-built tools to keep expenses in check and in-policy
- Automatic reconciliation for faster reimbursements
- Unlimited virtual corporate cards for employees
- Receipt scanning and claim submission on app
- Centralised expense database for maximum visibility
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