How are tax-deductible vs. non-deductible expenses coded?

Tax-deductible and non-deductible expenses are coded under separate GL accounts to ensure accurate tax reporting. This distinction helps you track eligible deductions and maintain compliance during audits.

Tax-deductible expenses are business costs that reduce your taxable income because they are directly related to running operations. These include payments for rent, software, salaries, office supplies, and travel required for business purposes. When recorded correctly, these expenses lower the total amount of income subject to tax and reflect the true cost of running your company.

Non-deductible expenses are costs that cannot be claimed as business deductions under tax laws. Examples include fines, penalties, entertainment spending, and personal expenses that are not tied to generating revenue. These items must still be tracked for transparency purposes, but they do not reduce your taxable income.

Accurate categorization of deductible and non-deductible expenses ensures financial reports are compliant and audit-ready.

How GL codes differentiate deductible and non-deductible spend

GL codes separate deductible and non-deductible expenses by mapping each to distinct accounts and tagging them appropriately within your chart of accounts. This ensures that every transaction accurately reflects its tax treatment.

• Step 1: Set up your chart of accounts. Create a structured chart of accounts with dedicated sub-accounts for deductible and non-deductible expenses. This separation makes it easier to track spend categories and keeps financial reporting aligned with tax rules.
• Step 2: Map each expense type. Link recurring deductible expenses such as rent, payroll, and software to standard operating accounts. Non-deductible costs like entertainment or penalties are mapped to restricted accounts to prevent them from being counted toward taxable deductions.
• Step 3: Apply expense tags or identifiers. Add clear tags or attributes to each transaction to label it as deductible or non-deductible. These tags simplify report filtering.
• Step 4: Automate transaction categorization. Use accounting systems or spend platforms like Ramp to auto-code expenses based on vendor type, transaction history, and policy rules. Automation reduces manual work and minimizes the risk of classification errors.
• Step 5: Review and validate regularly. Review flagged or high-value transactions during close to ensure the right GL code has been applied. Regular validation keeps your records clean and ready for audits.

Tax-deductible and non-deductible coding in Ramp

Ramp helps you manage tax-deductible and non-deductible expenses by applying clear policy logic to every transaction. Each expense passes through automated checks that classify it based on your company’s accounting rules and tax requirements.

Ramp’s expense recognition system identifies merchant types, payment contexts, and receipt data in real time to assign the correct category. Non-deductible purchases trigger alerts or additional review, while deductible expenses flow directly into their mapped GL accounts.

You can also create rules that partially separate mixed expenses, such as meals with alcohol, allowing only the eligible portion to count toward deductions.