Expense Categorization

Expense Categorization

Assign every transaction to the correct expense category so it flows to the right line on a tax return, produces accurate financial statements, and survives an audit.

Read these when needed

• Read references/DECISION-RULES.md when deciding whether a category is safe to auto-assign or should go to review.
• Run scripts/category_review_summary.py when you already have categorized records and need a deterministic summary by confidence, category, and review status.

Why categorization matters

The IRS doesn't audit "total expenses." It audits individual line items on Schedule C (or the equivalent form for your entity type). A business that lumps everything into "Other Expenses" invites scrutiny. Proper categorization also reveals spending patterns — you can't cut costs you can't see.

For the full Schedule C line-by-line reference (Lines 8–27a with what belongs and what doesn't), see the schedule-c-categories skill.

Categorization logic

Primary signal: vendor name

Most categorization comes from the vendor name alone. Use the mapping table below to auto-categorize high-confidence vendors.

Secondary signal: line items

When the vendor is ambiguous (Amazon, Walmart, Costco), look at line items from the receipt. This is where high-quality extraction is especially useful — line items matter more than totals. Amazon with "USB-C Hub, Monitor Stand" → Equipment. Amazon with "Paper Towels, Hand Soap" → Office Supplies. Mixed orders should be split across categories.

Tertiary signal: amount patterns

Recurring monthly charges at the same amount → likely Software & Subscriptions (Line 27a). Round-number transfers to individuals → likely Contractors (Line 11). Small charges at restaurants → Meals (Line 24b).

Learning from corrections

When the user corrects a categorization, store that mapping. User-confirmed mappings should override default logic going forward.

High-confidence vendor mapping (auto-categorize)

Ambiguous vendors (require line-item inspection)

Amazon — Could be office supplies, equipment, software, books, inventory, personal items. If line items were extracted, categorize each item separately. "USB-C Hub" → Equipment. "Printer Paper" → Office. "Python Crash Course" → Education. Without line items, flag for user review.

Walmart / Target / Costco — Same problem. Could be office supplies, breakroom supplies, or personal. Always ask.

Apple — Could be equipment (MacBook, iPad), software (App Store), or subscription (iCloud, Apple One). Amount helps: $999+ is likely hardware → Depreciation (Line 13). $0.99–$14.99 is likely apps/subscriptions → Other (Line 27a).

PayPal / Stripe / Square — The charge description is often the underlying vendor. "PayPal *ACME CORP" → look up ACME CORP. If only "PayPal" appears, flag for review. Processing fees are separate from the underlying purchases.

Split categorization

A single receipt can span multiple categories. This is common and correct:

Example: Amazon order for $347.82 containing: monitor stand ($89.99) → Equipment/Depreciation, printer paper 5-ream ($42.99) → Office, Python textbook ($54.95) → Education/Other, HDMI cables 3-pack ($19.89) → Equipment, break room coffee ($34.00) → Supplies, personal items ($106.00) → NOT DEDUCTIBLE.

Each line item gets its own category. The total must equal the sum of categorized amounts. Personal items must be excluded entirely.

Confidence scoring

Assign a confidence level to every categorization:

High — Unambiguous vendor (Google Ads → Advertising), or user has previously confirmed this mapping. Auto-categorize without review.

Medium — Reasonable inference from vendor + amount pattern, but could be wrong. Include in batch review.

Low — Ambiguous vendor, no line items, unusual amount. Must be reviewed.

User-confirmed — User explicitly approved or corrected this. Highest confidence. Store for future use.

Common categorization mistakes

Software in Office Expense. Office (Line 18) is for physical supplies. Software subscriptions go in Other (Line 27a). The IRS has benchmarks — $50K in "Office Supplies" looks abnormal.

Mixing travel and meals. Hotel is Travel (24a). Dinner during the trip is Meals (24b) at 50%. Different lines, different deductibility.

Owner health insurance on Schedule C. Goes on Form 1040 Line 17, not Schedule C. Putting it on Schedule C incorrectly reduces self-employment tax.

Expensing equipment over $2,500. Must be depreciated or Section 179'd (Line 13). See the depreciation-assets skill.

Deducting fines and penalties. Government fines are never deductible. Not even during business activity.

Treating reimbursed expenses as deductions. Client reimbursements are income; the expense is a deduction. They net out — don't deduct without recording the reimbursement.

Non-US jurisdictions

The Schedule C mapping is US-specific. Other frameworks:

UK (Self Assessment): Similar categories, different terminology. VAT-registered businesses track VAT rate (20%, 5%, zero, exempt) per transaction.

Canada (T2125): Similar to Schedule C. GST/HST input tax credits require tracking tax paid on purchases.

EU (VAT): Input VAT offsets Output VAT. Entertainment is typically non-deductible for VAT in many EU countries.

Australia (BAS): 10% GST on most business purchases is claimable as an input tax credit.

Ask the user for their jurisdiction before applying categories.

Output

Return categorized transactions with: date, vendor, description, amount, currency, category, Schedule C line (or equivalent), confidence level, and notes. Group by category. Flag Low-confidence items at top.

Include a summary:

Transactions categorized: 156
  High confidence: 112 (72%)
  Medium confidence: 28 (18%)
  Low confidence: 9 (6%)
  User-confirmed: 7 (4%)
Split transactions: 4
Uncategorized / needs review: 9
Top category by spend: Software & Subscriptions — $4,230.00
Potential personal expenses flagged: 3

Related skills

• schedule-c-categories — Full line-by-line reference for every Schedule C category
• meals-deduction — Detailed rules for meal deductibility and required documentation
• depreciation-assets — When to expense vs. capitalize, Section 179, bonus depreciation
• home-office — Simplified and actual methods for the home office deduction
• contractor-1099 — Tracking contractor payments and 1099 filing requirements

Agent metadata

skill: expense-categorization
version: 3.0
input: transaction list (from receipt-processing or bank statement)
output: categorized transaction table with Schedule C line mapping
dependencies:
  - receipt-processing (recommended for line-item data)
next_steps:
  - bank-reconciliation
  - tax-prep