What Qualifies as an Ongoing Business Expense?

An ongoing business expense is a recurring cost required to operate a company daily. For tax purposes, the Internal Revenue Service (IRS) allows businesses to deduct expenses that are both “ordinary and necessary.” An ordinary expense is common in your industry, while a necessary expense is helpful and appropriate for your business, though it does not need to be indispensable. These ongoing costs are distinct from one-time startup costs or major capital expenditures. Tracking these operational expenses is required for calculating a business’s taxable income and for proper financial management.

Categorizing Common Ongoing Operating Expenses

Many ongoing expenses relate to a business’s physical location. For businesses with a physical footprint, these costs include:

• Regular rent or lease payments for office space, warehouses, or retail locations.
• Utility costs, such as electricity, water, internet service, and phone lines.
• Routine repairs and maintenance services for the premises.
• Property insurance.

Personnel costs are a major category of ongoing expenses for any business with employees. This includes gross salaries, wages, and commissions paid to staff. A business must also account for its share of payroll taxes, which includes Social Security and Medicare taxes, as well as federal and state unemployment taxes. Contributions to employee benefit programs, such as health and retirement plans, are also continuous operational costs.

Businesses incur regular marketing and sales expenses to attract customers. Common expenditures in this area include:

• Payments for digital advertising campaigns, such as social media or search engine marketing.
• Website hosting fees and subscriptions for email marketing platforms.
• The cost of creating promotional materials like brochures or business cards.
• Fees paid to marketing agencies or consultants for their ongoing services.

Professional and administrative services are necessary for smooth operations. These ongoing expenses include:

• Fees for legal, accounting, bookkeeping, and tax preparation services.
• Costs for everyday office supplies like paper and ink.
• Bank service charges, monthly maintenance fees, and credit card processing fees.
• Renewals for business licenses and permits required for operation.

Technology and software create a range of ongoing expenses. Many businesses pay monthly or annual subscription fees for software, such as customer relationship management (CRM) systems, accounting software, and project management tools. These recurring payments ensure continued access to the tools needed for efficient operation. The cost of cloud storage and other web-based services also falls under this category.

Vehicle and travel costs are a regular part of operations for many businesses, and the operational costs of a vehicle used for business can be deducted. This is done by either tracking actual expenses like fuel, insurance, and repairs, or by using the standard mileage rate set by the IRS. Ongoing travel expenses for business purposes, such as airfare, lodging, and a portion of meal costs during business trips, are also deductible operating expenses.

Differentiating Cost of Goods Sold

While operating expenses cover the costs of running a business, the Cost of Goods Sold (COGS) relates to the direct costs of producing or acquiring goods for sale. COGS is not an operating expense but a separate calculation subtracted from total revenue to determine gross profit. For a manufacturing business, this includes the cost of raw materials and the wages of labor directly involved in making the product. For a retail business, COGS consists of the purchase price of inventory.

Indirect costs, such as marketing or administrative salaries, are not included in COGS and are classified as operating expenses. For example, a coffee shop’s COGS would include the cost of coffee beans, milk, and paper cups—items that are a direct part of the final product. The shop’s rent, administrative salaries, and marketing costs would be operating expenses.

Understanding Depreciation as an Ongoing Deduction

When a business purchases a major asset like machinery or a building, the cost is not deducted in the year of purchase. Instead, the cost is spread out over the asset’s “useful life” through depreciation. This non-cash expense reflects the asset’s wear and tear over time, allowing an ongoing deduction for a one-time capital expenditure. The IRS provides rules for this under the Modified Accelerated Cost Recovery System (MACRS), which dictates the recovery period for different asset types.

Depreciation begins when an asset is “placed in service,” meaning it is ready for use. The tax code also provides accelerated depreciation options. Section 179 allows a business to expense the full cost of certain qualifying property in the year it is placed in service, up to a limit. Another provision, bonus depreciation, allows an additional first-year deduction for qualified property. For property placed in service in 2025, the bonus depreciation rate is 40% and is scheduled to decrease in subsequent years. These methods provide a way to take a larger deduction upfront rather than spreading it over many years.

Recordkeeping and Documentation Requirements

Organized records are required to substantiate all business expenses. While the IRS does not mandate a specific system, your chosen method must clearly show income and expenses. Supporting documents like invoices, receipts, and bank statements provide the proof needed for your tax return. For every expense, documentation should show the amount, date, payee, and a description of the business purpose.

The IRS requires a receipt for any expense over $75, but it is a best practice to keep all receipts. Certain expenses require more specific documentation, such as a detailed mileage log for vehicle expenses that records the date, miles, and purpose of each trip. Using dedicated business bank and credit card accounts helps avoid commingling personal and business funds, which simplifies tracking. Utilizing accounting software allows for the categorization of transactions and generation of financial reports, and digital recordkeeping is an efficient way to maintain records.

The IRS advises keeping records for three years from the date you filed your tax return. This period extends to six years if you underreport income by more than 25% of the gross income on your return. Records related to business assets should be kept until the asset is sold or disposed of to correctly calculate depreciation and any gain or loss.