Receiptor-AI Schedule C Expense Categories
The authoritative category reference for US small businesses filing Schedule C (Form 1040). Use this to determine which line an expense belongs on. S-Corps (Form 1120-S) and C-Corps (Form 1120) use different forms but similar categories.
Part III: Cost of Goods Sold (Lines 33–42)
Not an operating expense. COGS is reported separately and subtracted from revenue to calculate gross profit. Includes: raw materials, inventory purchases, direct labor for manufacturing, shipping to customers (if you're the seller), packaging materials.
Do NOT put SaaS tools, office supplies, or general business expenses here. COGS is only for costs directly tied to producing the goods you sell. If you're a service business with no physical product, you likely have no COGS.
Part II: Expenses (Lines 8–27a)
Line 8 — Advertising
Belongs here: Google Ads, Meta Ads, LinkedIn Ads, print ads, sponsorships, business cards, trade show booth fees, SEO services, PR agency fees, promotional merchandise, influencer payments for promotion, direct mail campaigns, billboard ads, podcast sponsorships.
Does NOT belong here: Website hosting (→ Line 27a Other), software tools used for marketing like HubSpot or Mailchimp (→ Line 27a Other), meals at networking events (→ Line 24b Meals).
Line 9 — Car and truck expenses
Belongs here: Gas, oil changes, tires, insurance, registration, lease payments — OR — the standard mileage rate (67¢/mile for 2024, check IRS annually). You pick one method per vehicle.
Method lock-in: If you use actual expenses in year 1 of a vehicle, you generally can't switch to standard mileage for that vehicle later. If you start with standard mileage, you can switch to actual (but depreciation becomes limited to straight-line). Best practice: start new vehicles on standard mileage to preserve flexibility.
Does NOT belong here: Parking and tolls on business trips (→ Line 24a Travel). Commuting from home to a regular office (never deductible — this is personal). Vehicle insurance and repairs if using the standard mileage rate (they're already built into the rate).
See the vehicle-expenses skill for detailed rules on mileage tracking and method selection.
Line 10 — Commissions and fees
Belongs here: Sales commissions paid to non-employees, referral fees, finder's fees, marketplace seller fees (eBay, Etsy, Amazon seller fees).
Does NOT belong here: Payment processing fees like Stripe 2.9%+30¢ or PayPal fees (→ Line 27a Other). Employee commissions (→ Line 26 Wages).
Line 11 — Contract labor
Belongs here: Payments to independent contractors, freelancers, consultants, subcontractors. This includes agencies if they're not incorporated.
Critical rule: Track per-contractor totals throughout the year. Any contractor paid ≥$600 in a calendar year requires a 1099-NEC filing. Starting 2026, this threshold increases to $2,000. See the contractor-1099 skill for filing rules, deadlines, and penalties.
Does NOT belong here: Payments to employees (→ Line 26 Wages). Payments to C-Corps or S-Corps (generally no 1099 required — exceptions: legal services and medical/health care services always get a 1099 regardless of entity type).
Line 12 — Depletion
Only for businesses extracting natural resources (mining, oil, gas, timber). Almost never applies to typical small businesses. Skip this line unless you're in extractive industries.
Line 13 — Depreciation and Section 179
Belongs here: Business assets with a useful life >1 year AND cost >$2,500: computers, vehicles, machinery, furniture, leasehold improvements, certain software. These must be capitalized and depreciated over time (or fully expensed via Section 179 or bonus depreciation).
De minimis safe harbor: Assets ≤$2,500 per invoice/item can be expensed immediately instead of depreciated. Requires an annual election statement filed with your tax return.
See the depreciation-assets skill for Section 179 limits, bonus depreciation phase-out schedule, and MACRS class lives.
Does NOT belong here: Inventory (→ COGS), land (not depreciable — it doesn't wear out), repairs that restore property to working condition without extending its useful life (→ Line 21 Repairs).
Line 14 — Employee benefit programs
Belongs here: Health insurance premiums for employees (not the owner), retirement plan contributions for employees, group life insurance, dependent care assistance, educational assistance up to $5,250/yr per employee, employee wellness programs.
Does NOT belong here: Owner's health insurance in a sole proprietorship (deducted on Form 1040 Line 17, NOT Schedule C — putting it here incorrectly reduces self-employment tax). Owner's retirement contributions (→ Form 1040 Line 20).
Line 15 — Insurance (other than health)
Belongs here: Business liability insurance, professional liability (E&O), product liability, commercial property insurance, business interruption, workers' comp, cyber liability, key person life insurance, commercial auto insurance (if not using standard mileage).
Does NOT belong here: Owner's personal health insurance (→ Form 1040), vehicle insurance if using the standard mileage rate (already included in the rate), homeowner's insurance (→ Form 8829 home office calculation if applicable).
Line 16a — Mortgage interest (business property)
Belongs here: Interest on a mortgage for business property you own — like a commercial building or warehouse.
Does NOT belong here: Home mortgage interest for home office (→ Form 8829). Personal mortgage interest (→ Schedule A itemized deductions).
Line 16b — Other interest
Belongs here: Business credit card interest, business loan interest, line of credit interest, equipment financing interest.
Does NOT belong here: Personal credit card interest (never deductible). Interest on loans used to buy tax-exempt investments (never deductible).
Line 17 — Legal and professional services
Belongs here: Attorney fees (business-related), CPA/bookkeeper fees, tax preparation fees for the business return, consulting fees for business advice, patent attorney fees, accounting software subscriptions (QuickBooks, Xero, FreshBooks).
Does NOT belong here: Legal fees for personal matters, fines and penalties imposed by government agencies (never deductible — not even parking tickets incurred during business trips).
Line 18 — Office expense
Belongs here: Printer paper, ink/toner, pens, sticky notes, stamps, postage, shipping supplies (for business operations, not COGS), small office items under ~$200, cleaning supplies for office space.
Does NOT belong here: Home office expenses (→ Form 8829), furniture over $2,500 (→ Line 13 Depreciation), software subscriptions (→ Line 27a Other). This is a common mistake — the IRS has benchmarks for office expense amounts, and including $50K of SaaS spending here looks abnormal and triggers questions.
Line 19 — Pension and profit-sharing plans
Belongs here: Employer contributions to employee retirement plans: SEP-IRA employer contributions for employees, SIMPLE IRA employer match for employees, 401(k) employer match for employees.
Does NOT belong here: Owner's own SEP-IRA, SIMPLE, or Solo 401(k) contributions (→ Form 1040 Line 20 — this is an "above the line" deduction on the personal return, not a business expense).
Line 20a — Rent or lease: vehicles, machinery, equipment
Belongs here: Equipment leases, vehicle leases (if not reporting the vehicle on Line 9), heavy machinery rentals, copier leases.
Line 20b — Rent or lease: other business property
Belongs here: Office rent, coworking space (WeWork, Regus, Industrious), warehouse rent, storage unit, retail space, land lease.
Does NOT belong here: Home office rent portion (→ Form 8829). Security deposits (not an expense until forfeited — they're an asset while refundable).
Line 21 — Repairs and maintenance
Belongs here: Fixing broken equipment, building maintenance, HVAC servicing, plumbing repairs, computer repair, painting, replacing worn parts. The key test: does it restore property to its previous working condition without making it significantly better or extending its useful life?
Does NOT belong here: Improvements that extend useful life, add value, or adapt property to a new use (→ Line 13 Depreciation — these are capitalized). Vehicle repairs if using the standard mileage rate (already included in the rate).
Line 22 — Supplies
Belongs here: Materials consumed in business operations that are NOT inventory: cleaning supplies, safety equipment, small tools under ~$200, breakroom supplies (coffee, paper towels), first aid supplies.
Does NOT belong here: Office supplies (→ Line 18 — yes, the IRS distinguishes these). Items held for sale to customers (→ COGS).
Line 23 — Taxes and licenses
Belongs here: State/local business licenses, professional license fees, employer portion of payroll taxes (FICA, FUTA, SUTA), state franchise tax, personal property tax on business assets, sales tax paid on business purchases (if not tracking separately), business registration fees.
Does NOT belong here: Federal income tax (never deductible on Schedule C). Self-employment tax (deducted on Form 1040, not Schedule C). Sales tax collected from customers (that's a liability you owe the state, not an expense).
Line 24a — Travel
Belongs here: Airfare, hotel, rental car, taxi/rideshare for business trips, baggage fees, airport parking, tolls on business trips, train/bus fare, tips to porters/bellhops. Must be away from your tax home overnight or long enough to require sleep or rest.
Does NOT belong here: Daily commuting (never deductible). Meals during travel (→ Line 24b — they're only 50% deductible). Travel that is primarily personal with incidental business (the business portion may be deductible but the allocation is strict).
Line 24b — Meals
Belongs here: Business meals with clients, prospects, or business associates where business is discussed. Currently 50% deductible.
Documentation required for every meal: Amount, date, name and location of restaurant, business purpose ("discussed Q3 marketing strategy"), names of all attendees, and business relationship of attendees ("Jane Smith, client at Acme Corp"). Without this documentation, the deduction is disallowed entirely.
See the meals-deduction skill for detailed rules, the 2026 on-premises meals change, and entertainment (0% since 2018).
Does NOT belong here: Meals while NOT traveling and NOT with a business associate. Lavish or extravagant meals. Entertainment (sporting events, concerts, golf — 0% deductible since TCJA 2018 even if business is discussed).
Line 25 — Utilities
Belongs here: Electric, gas, water, sewer, trash removal for business premises. Internet and phone: business-use percentage only.
Does NOT belong here: Home utilities (→ Form 8829 for home office — only the business-use percentage). The personal portion of a cell phone bill (if your phone is 60% business, only 60% of the bill goes here).
Line 26 — Wages
Belongs here: Gross wages paid to W-2 employees only. This is the total before withholdings — the employee's gross pay, not the net check amount.
Does NOT belong here: Payroll taxes (→ Line 23). Employee benefits (→ Lines 14, 19). Payments to independent contractors (→ Line 11). Owner's draw or salary in a sole proprietorship (not deductible — your profit IS your compensation).
Line 27a — Other expenses
Belongs here: Anything legitimate that doesn't fit Lines 8–26. Common items: bank fees, merchant processing fees (Stripe, Square, PayPal), software subscriptions (SaaS tools, cloud hosting), domain registration, SSL certificates, professional memberships and dues, trade publications, continuing education (courses, books, conferences that maintain or improve existing skills), bad debts written off, moving expenses related to business.
Caution: The IRS pays extra attention to large amounts on Line 27a. If something fits a specific line above, put it there. Don't use "Other" as a default dumping ground.
You must itemize Line 27a expenses on Part V of Schedule C.
Business use of home (Form 8829 → Line 30)
Not on Schedule C directly — the deduction flows from Form 8829 to Schedule C Line 30. See the home-office skill for the simplified method ($5/sq ft, max $1,500) and actual expense method.
Common categorization mistakes
Software in Office Expense. Office (Line 18) is for physical office supplies. Software subscriptions belong on Line 27a Other. The IRS has statistical norms for each line — abnormal amounts invite scrutiny.
Owner health insurance on Schedule C. Self-employed health insurance goes on Form 1040 Line 17. Putting it on Schedule C incorrectly reduces self-employment tax, which is wrong and attracts penalties.
Equipment expensed as supplies. Items over $2,500 with a useful life over 1 year must be depreciated or Section 179'd (Line 13). A $3,000 laptop in "Office Supplies" is incorrect.
Fines and penalties deducted. Government fines, traffic tickets, and penalties are never deductible. Not even ones incurred during business activities.
Mixing travel and meals. Hotel is Travel (24a). Dinner during the same trip is Meals (24b) at 50%. They're on the same trip but different lines with different deductibility.
Non-US note
This is US-specific. UK uses Self Assessment categories, Canada uses T2125, EU businesses track VAT input/output, Australia uses BAS categories. The expense-categorization skill covers non-US frameworks.