What expense category does shipping come under?

Accurately categorizing shipping costs is key to keeping your finances clear and your tax filings accurate. But where exactly should you record shipping expenses in your books? Let's break down how to classify shipping costs for your business.

Classifying shipping expenses

Shipping expenses are classified differently based on their purpose. Whether tied to sales, operations, or deliveries, knowing the right category ensures clarity in your financial reporting.

• Cost of goods sold (COGS): If you're shipping products to customers, these costs are directly tied to sales and can be included in your COGS. This reflects the total cost associated with selling your goods.
• Operating expenses: Shipping costs for activities not directly related to sales—like sending supplies or equipment—can be categorized as operating expenses. This includes general business shipping that supports your operations.
• Delivery expenses: If your business covers the cost of shipping products to customers, you might record these costs separately as delivery expenses. This helps you track shipping costs independently from production and operational expenses.

Examples of shipping expenses

Shipping costs can vary depending on your business activities:

• Shipping products to customers: Costs for postage, packaging, and delivery when fulfilling orders. These can be included in COGS or recorded as delivery expenses.
• Receiving inventory: Expenses for freight charges when you receive goods from suppliers. These are typically part of your COGS.
• Sending samples or marketing materials: Shipping costs for sending promotional items or samples can be categorized as operating expenses.
• Return shipping costs: Expenses when customers return products. These can also be included under operating expenses.

A good example to help you grasp this is if you spend $300 this month shipping products to customers, you would categorize that expense under COGS or delivery expenses, depending on your accounting practices.

Tax implications of shipping expenses

Classifying shipping expenses properly ensures you’re taking full advantage of deductions while staying compliant with tax laws. Here’s what you need to know:

• Deductible expenses: Shipping costs are generally deductible as ordinary and necessary business expenses.
• Affecting gross profit: Including shipping costs in COGS will impact your gross profit calculations, which can influence your tax liabilities.

Detailed and accurate records of your shipping expenses are essential. Misclassification can lead to errors in financial statements or scrutiny from tax authorities, so it’s worth investing the effort upfront.

Let Ramp automate your expense process

Managing shipping expenses can be a hassle, but it doesn't have to be. Ramp automates the categorization and tracking of your shipping costs, making expense management a breeze. With Ramp, you'll have accurate, up-to-date financial data at your fingertips, so you can focus on running your business instead of wrestling with spreadsheets.