Miscategorized expenses cost you deductions, inflate your tax bill, and raise audit flags. As a tax preparer, I see the same mistakes repeatedly. Here are the 15 most common—and how to fix them.
1. Meals vs. Entertainment
The mistake: Lumping meals and entertainment together, or deducting entertainment at all.
The rule:
- Business meals: 50% deductible
- Entertainment: 0% deductible (since 2018 tax reform)
Common examples:
- ✅ Lunch with a client discussing business = 50% deductible meal
- ❌ Concert tickets for client entertainment = NOT deductible
- ❌ Golf outing with client = NOT deductible (even if you discuss business)
Fix: Create separate categories for Meals (deductible) and Entertainment (non-deductible or personal).
2. Home Office Expenses
The mistake: Deducting 100% of home expenses or not deducting home office at all.
The rule: Only the business-use percentage of your home is deductible. Calculate by square footage:
Business % = Office Square Feet ÷ Total Home Square Feet
Example: 200 sq ft office in 2,000 sq ft home = 10% business use
What's deductible:
- Rent or mortgage interest (10%)
- Utilities (10%)
- Insurance (10%)
- Repairs to office area (100%)
- Repairs to whole house (10%)
Fix: Track home expenses separately and apply your business percentage at tax time.
3. Software Subscriptions
The mistake: Categorizing all software as "Office Expense" or missing software deductions entirely.
Better approach:
- Accounting software (QuickBooks, Xero) → Professional Services or Software
- Creative software (Adobe, Canva) → Software or Advertising (if marketing-related)
- Communication tools (Zoom, Slack) → Software or Utilities
- Cloud storage (Dropbox, Google Drive) → Software
Fix: Create a dedicated "Software & Subscriptions" category. These are fully deductible business expenses.
4. Vehicle Expenses
The mistake: Mixing standard mileage rate with actual expenses.
The rule: Choose ONE method:
- Standard mileage: 67¢/mile (2024). Only parking and tolls are additional.
- Actual expenses: Gas, repairs, insurance, depreciation × business use %
Common error: Claiming mileage AND gas, or mileage AND car insurance.
Fix: Pick one method and stick with it. Standard mileage is usually simpler; actual expenses may be better for expensive vehicles with high business use.
5. Contractor vs. Employee Payments
The mistake: Treating contractor payments as general expenses instead of tracking them for 1099 reporting.
The rule: Payments $600+ to individuals (not corporations) require Form 1099-NEC.
Fix: Create a specific "Contract Labor" category. At year-end, filter this category to generate 1099s.
6. Bank and Payment Processing Fees
The mistake: Missing these entirely because they're small and frequent.
Common fees to track:
- Monthly bank service charges
- Wire transfer fees
- Stripe/PayPal/Square processing fees
- Merchant account fees
- ACH fees
Fix: Create a "Bank Fees" or "Payment Processing" category. These add up—often $500-2000/year for small businesses.
7. Professional Development
The mistake: Missing training, courses, and certifications as deductions.
Deductible:
- Courses related to current business
- Professional certifications and renewals
- Industry conferences
- Books and publications
- Professional association dues
Not deductible: Education for a new career or unrelated field.
Fix: Categorize as "Professional Development" or "Education & Training".
8. Interest Expenses
The mistake: Missing business credit card interest or categorizing it wrong.
Deductible interest:
- Business credit card interest
- Business loan interest
- Line of credit interest
- Equipment financing interest
Not deductible: Personal credit card interest (even if you bought business items).
Fix: Create an "Interest Expense" category. Only include interest on true business debt.
9. Shipping and Postage
The mistake: Categorizing as "Office Expense" when it should be separate.
Why it matters: For product-based businesses, shipping can be a significant expense. Tracking it separately helps with pricing and profitability analysis.
What to include:
- USPS, UPS, FedEx shipping
- Postage and stamps
- Shipping supplies (boxes, tape, labels)
- Shipping software subscriptions
Fix: Create "Shipping & Postage" as a separate category, especially for e-commerce.
10. Self-Employed Health Insurance
The mistake: Deducting on Schedule C instead of Schedule 1.
The rule: Self-employed health insurance is deducted on Schedule 1, Line 17—NOT on Schedule C. This is an "above the line" deduction that reduces your AGI.
What qualifies:
- Health insurance premiums for yourself
- Coverage for spouse and dependents
- Dental and vision insurance
- Medicare premiums (once eligible)
Fix: Track health insurance separately. Don't include in business expense categories.
11. Retirement Contributions
The mistake: Deducting SEP-IRA or Solo 401(k) on Schedule C.
The rule: Self-employed retirement contributions are deducted on Schedule 1, Line 16—NOT on Schedule C.
Fix: Track retirement contributions separately from business expenses.
12. Owner Draws as Expenses
The mistake: Categorizing owner draws (transfers to personal account) as business expenses.
The rule: Owner draws are NOT expenses. They're equity transactions—money you're taking out of the business for personal use.
Fix: Create an "Owner Draw" category that's excluded from expense reports. See our guide on personal vs. business transactions.
13. Business Gifts
The mistake: Deducting full cost of client gifts.
The rule: Business gifts are limited to $25 per recipient per year.
Example: A $100 gift basket to a client = only $25 deductible.
Fix: Track gifts separately. Note the recipient for documentation.
14. Capital Expenses as Current Expenses
The mistake: Expensing equipment that should be depreciated.
The rule: Assets over $2,500 with useful life over 1 year must be capitalized (depreciated over time) OR deducted via Section 179 election.
Examples:
- $3,000 laptop → Capitalize or Section 179
- $500 printer → Can expense directly
- $10,000 vehicle → Capitalize or Section 179
Fix: Flag large purchases for depreciation review at year-end.
15. Mixed Personal/Business Purchases
The mistake: Deducting 100% of items used for both personal and business.
Common examples:
- Cell phone used 60% for business → Only 60% deductible
- Computer used 80% for business → Only 80% deductible
- Internet used 40% for business → Only 40% deductible
Fix: Document your business use percentage and apply it at tax time.
Categorization Checklist
Before finalizing your books, verify:
- ☐ Meals and entertainment are separate
- ☐ Vehicle expenses use one method (mileage OR actual)
- ☐ Contractor payments are tracked for 1099s
- ☐ Software subscriptions are captured
- ☐ Bank and payment processing fees are included
- ☐ Health insurance is NOT on Schedule C
- ☐ Retirement contributions are NOT on Schedule C
- ☐ Owner draws are NOT categorized as expenses
- ☐ Large purchases are flagged for depreciation review
- ☐ Mixed-use items have documented business percentages
Questions about expense categorization? Contact us for guidance.