every transaction gets a category. categories drive two things: your Schedule C tax filing and your unit economics (how much it costs to acquire a customer vs serve them vs run the business).
how categories work
each category belongs to one of 6 groups. the group determines where the expense shows up in your P&L and which Schedule C line it maps to.
- income: money coming in (revenue, interest, cashback)
- CAC (customer acquisition cost): money spent to get new customers (ads, sales tools)
- COGS (cost of goods sold): money spent to deliver your product (hosting, APIs, payment processing)
- operating (opex): money spent to run the business (software, legal, payroll, office)
- transfer: money moving between accounts, not P&L (owner's draw, capital contributions)
- not business: personal expenses that hit your business account
why it matters
for taxes: each category maps to an IRS Schedule C line. when you categorize a transaction, the Schedule C line follows automatically. no manual sorting at tax time.
for unit economics: the CAC/COGS/opex split lets you see your real margins. revenue minus COGS is gross margin. revenue minus COGS minus CAC is contribution margin. these numbers tell you if your business model works.
complete category list
income
- Revenue → Line 1 (gross receipts)
- Interest & Cashback → Line 6 (other income)
acquisition (CAC)
- Marketing & Advertising → Line 8 (advertising)
- App Store Advertising → Line 8 (advertising)
- Sales Tools & CRM → Line 22 (supplies)
- Partnerships & Affiliates → Line 27a (other)
cost of goods sold (COGS)
- Hosting & Infrastructure → Line 27a (other)
- Payment Processing Fees → Line 27a (other)
- Third-party API Costs → Line 27a (other)
- CDN & Bandwidth → Line 27a (other)
- Customer Support Tools → Line 27a (other)
operating (opex)
- Software & Subscriptions → Line 27a (other)
- Legal & Professional → Line 17
- Accounting & Bookkeeping → Line 17
- Contract Labor → Line 11
- Payroll & Wages → Line 26
- Insurance → Line 15
- Office & Rent → Line 20b
- Office Supplies → Line 18
- Travel → Line 24a
- Meals → Line 24b (50% deductible)
- Utilities & Internet → Line 25
- Bank & Credit Card Fees → Line 27a (other)
- Taxes Paid → Line 23
- Depreciation / Section 179 → Line 13
- Home Office → Form 8829 (separate form)
- Other Expenses → Line 27a (other)
- Personal → no Schedule C line (not deductible)
transfer (non-P&L)
- Capital Contribution → no Schedule C line
- Owner's Draw → no Schedule C line
- Inter-account Transfer → no Schedule C line
category vs Schedule C line
categories organize expenses by business purpose (what you spent money on). Schedule C lines are the IRS's way of organizing the same expenses for tax reporting. each category maps to exactly one Schedule C line, but multiple categories can map to the same line.
example: "Hosting & Infrastructure" and "Software & Subscriptions" are different categories (COGS vs opex) but both map to Line 27a on Schedule C.
you pick the category. the Schedule C line fills in automatically.
related
- schedule c lines - complete list of IRS Schedule C expense lines
- counterparties - setting default categories per vendor/customer