What expense category is Utilities?

Utilities are essential services that businesses rely on for their daily operations. These services include electricity, gas, water, and sewage, all of which contribute to the functionality and comfort of the workspace. However, businesses need to understand how to categorize and account for utility expenses properly.

What Expense Category Do Utility Expenses Come In?

Utility expenses typically fall under the category of operating expenses in accounting. Operating expenses are the ongoing costs a business incurs to run its daily operations. They are distinct from capital expenses, which are investments in assets with a useful life of more than one year.

Important Considerations While Classifying Utility Expenses

Now, remember that while operating expenses are the most common category for utility expenses, there are situations where they might be classified differently. The IRS Publication 535 indicates that utility expenses can sometimes fall under selling expenses or administrative expenses.

For example:

• Manufacturing: If utilities are directly used in the manufacturing process, they might be included in the cost of goods sold (COGS). This applies to utilities used to power machinery, heat production facilities, or cool manufacturing plants.
• Selling: Utilities used in sales offices or showrooms could be classified as selling expenses.
• Administrative: Utilities used in administrative offices or for general business purposes could be classified as administrative expenses.

The specific classification depends on the nature of the business and how the utilities are used. It's essential to consult your company's chart of accounts or seek guidance from an accountant to ensure accurate categorization.

Examples of Utility Expenses

• Electricity: Costs of powering lights, equipment, and HVAC systems.
• Gas: Costs of heating and cooking.
• Water: Costs of water usage for restrooms, kitchens, and landscaping.
• Sewage: Costs of wastewater disposal.
• Trash Removal: Costs of garbage collection and disposal.

Tax Implications of Utility Expenses

Utility expenses are generally tax-deductible business expenses. This means you can deduct these costs from your business income to reduce your taxable profit. However, specific rules and limitations may apply, so it's crucial to consult a tax professional for advice.

How Fyle Can Help

Fyle's AI-powered expense management platform can help businesses accurately categorize and track their utility expenses. Fyle's AI can automatically extract data from utility bills, ensuring accurate record-keeping and compliance with tax regulations. This saves businesses time and reduces the risk of errors, making tax preparation easier and more efficient.