Understanding transaction categories in Heard

Every dollar that moves through your practice needs a home. When your bookkeeper sorts a transaction into a category, they are building the financial picture that powers your reports, your tax filing, and your sense of where your money is going.

Knowing what each category means helps you read your own books with confidence and spot anything that looks off.

What is a chart of accounts?

Your chart of accounts is the full list of categories your bookkeeper uses to sort every transaction. Think of it as the labeled drawers where your money gets filed.

Below is what each category covers, along with a few real examples so you can see where your transactions fall.

Why categories matter for your taxes

Your bookkeeping team categorizes with tax compliance in mind. The IRS only counts expenses that are ordinary and necessary for your practice. Careful categorization keeps your owner's distributions accurate, lowers your audit risk, and keeps personal items off your profit and loss so your quarterly estimates stay reliable. A handful of categories trip people up most often, and the callouts below flag them as you go.

Income

This is the money coming into your practice.

Provider Income vs. Owner's Investment

Income you earn for services and deposit into a business account is Provider Income. Money you move in to keep the practice running, such as covering operating costs, is recorded as Owner's Investments, not income. One watch-out: if you deposit earned income into your personal account first and then move it to the business, it can look like Owner's Investments. Leaving a note that it is income keeps your total earnings from being understated. W-2 income you earn outside your practice or from your S Corporation doesn't belong in your books; record only the 1099 income your practice generates.

Payroll and compensation

If you are an S Corporation and have employees or pay contractors, record those costs, along with related taxes and benefits, here.

Health, dental, and vision insurance for sole proprietors

The Payroll insurance categories above are for premiums you pay on behalf of W-2 employees. If your practice is a sole proprietorship, your own health, dental, and vision insurance are personal expenses, so they stay off your profit and loss. You can still claim the self-employed health insurance deduction on your personal tax return. For how this works, see How do health insurance premiums impact Sole Proprietor taxes?.

Operating expenses

These are the everyday costs of running your practice.

Marketing, education, and professional services

Space, utilities, and technology

Insurance

Office, equipment, and upkeep

For purchases, the $2,500 capitalization threshold is applied per item, not per receipt total. An item under $2,500 is recorded as an expense immediately. A single item at or above $2,500 is tracked as an asset on your balance sheet and depreciated over time (more on that in the balance sheet section below). A receipt totaling more than $2,500 but made up of individually smaller items stays an expense.

Travel, meals, and transportation

Auto Related Expenses: business use only

If you use your personal vehicle for your practice, only the business-use percentage of your auto costs is deductible, not the full bill. Heard collects details about your vehicle use during annual tax filing to work out that percentage. If a vehicle is owned under your business name, you can upload the registration documents to Heard. For the rules on buying or leasing a vehicle through your practice, see If I buy a car for my business, can I use it as a tax write-off?. For a deeper dive, see Heard's guide Deducting business mileage.

Meals & Entertainment vs. a personal expense

A meal counts as a business expense only when it is directly tied to conducting business, like a meal with a client, colleague, or professional contact where business is discussed. A coffee on your own lunch break is personal, so it is recorded as an Owner's Distribution rather than a business meal. For what qualifies, see What counts as a business meal?. For S corporations, business travel and related costs are typically claimed as a reimbursement under an Accountable Plan.

Uniforms & Laundry: what qualifies

This category is narrow. It covers work-specific clothing, uniforms, and protective gear required for your work that are not suitable for everyday wear. Examples may include scrubs, gloves, masks, other PPE, or clothing specifically designed or branded for your practice.

Business branding is not required for an item to qualify. The key is that the clothing or protective gear is required for the work and is not suitable for ordinary everyday use. Everyday clothing that can be worn outside of work, such as suits, business attire, or regular shoes, is personal and does not belong here.

The cost of cleaning and maintaining qualifying work clothing can also be included.

Fees, giving, and compliance

Charitable Donations

Only donations to registered 501(c)(3) organizations are tax deductible. Even then, charitable donations are not deducted when calculating your practice's net profit; they are handled elsewhere on your tax return. For that reason, they are kept off your profit and loss statement.

One common question: donating your time or offering free or pro bono services is not a tax write-off, even though it is generous. Only money or goods you give to a qualifying charity can count. See Can I write off pro bono work? for more.

Fees on personal accounts

For any account marked personal, Heard does not bring bank service charges, ATM fees, or card merchant fees into your books.

Loans, depreciation, and taxes

Where your tax payments go

Federal and state income tax payments are not business expenses because the tax is owed by you as the individual taxpayer, not by the practice. So these payments are recorded as an Owner's Distribution and kept off your profit and loss.

City, local, and state franchise or business taxes are different: those are recorded under Taxes: City/Local Taxes or Taxes: State Franchise Tax. Because these can show up in a few different forms, please upload a receipt to Documents > Taxes so your bookkeeper can confirm the tax type and categorize it correctly.

Therapy-specific and clinical costs

Other Expenses: use sparingly

Other Expenses is a catch-all for business costs that truly fit nowhere else, and it draws close attention during a tax audit, so your bookkeeper should use a specific category whenever one fits. A transaction lands here only when needed, usually with a note explaining it. If a cost is non-business, or its purpose cannot be confirmed, record it as an Owner's Distribution instead. For S corporations, personal expenses automatically fall under Owner's Distribution.

Practice-specific supplies

These categories apply to specific practice types beyond talk therapy.

These categories apply to specific practice types beyond talk therapy.

Accountable plan reimbursements

An accountable plan is a formal arrangement for S Corporations that lets your business reimburse you for the business-use share of certain personal costs, such as a home office or personal cell phone, without that reimbursement counting as taxable income. These categories track those reimbursements.

Balance sheet categories

Not every transaction is income or an expense. Some move money between your own accounts, track what you own, or track what you owe. These show up on your balance sheet, not your profit and loss.

This is where a few common surprises live: a transfer between your accounts or a payment toward your credit card looks like activity, but it is not income or a new expense. Here is the thing: those expenses were already recorded when you made the original purchases.

Assets: what you own

Money Transfer vs. Owner's Distribution vs. Owner's Investments

These three look similar but mean different things:

• Money Transfer: moving money between two business accounts.
• Owner's Distribution: moving money from a business account to a personal account for personal use.
• Owner's Investments: moving money from a personal account into the business to keep the practice running.

Keeping personal and business activity separate matters most for S corporations, which is why a dedicated business bank account is best practice. Mixing personal transactions into business accounts can raise audit risk and, in serious cases, expose owners to personal liability for the business's debts. See: Why do I need to set up a business bank account as an S corporation?.

Property, plant, and equipment (PP&E) covers the larger assets your practice keeps and uses over several years, including anything at or above the $2,500 threshold. The $2,500 threshold applies per item, not per receipt. A single $3,000 receipt made up of items that each cost less than $2,500 is recorded as an expense, not capitalized. To capitalize an item, your bookkeeper must confirm it is a single item over $2,500, so please upload the receipt to Documents > Taxes.

Liabilities: what your business owes

A loan or other debt appears on your books only if it is in the business's name. Debts held in your personal name are not recorded as business liabilities.

Credit Card Payments vs. Owner's Investments vs. Owner's Distribution

Who paid whom decides the category:

• Credit Card Payment: a business account pays a business credit card.
• Owner's Investments: you pay a business credit card from a personal account.
• Owner's Distribution: a business account pays a personal credit card, since that is for personal purposes.

A payment to an account or card not connected to Heard is treated as a personal transaction. If you paid for a business expense with a personal card, see How to add business transactions charged to a personal card. Paying the card isn't an expense: the purchases were already recorded when you made them, so counting the payment again would double-count them.

Leased vehicles work differently

If you lease a vehicle, meaning a true lease where you will not own it at the end of the term (not a lease-to-own), only the business-use share of the lease payments is deductible, and only under the actual-expense method, so the full payment is not always deductible. For higher-value leased vehicles (fair market value over $62,000 at lease start for 2025), the IRS lease inclusion amount slightly reduces the deductible amount each year, and that threshold is set annually. Your tax team handles the specifics at filing.

Equity: your stake in the business

Owner's distribution vs. paying yourself a salary

An owner's distribution is a draw: money you take out of the business for yourself, tracked under equity. For sole proprietors, this is how you pay yourself; see How to Pay Yourself as a Sole Proprietor. A salary runs through payroll as W-2 wages, which generally applies if your practice is taxed as an S corp; if so, see How do I set a reasonable salary, and why is it important?. Which one fits depends on your entity type, so it is worth confirming with a tax professional.

Retirement contributions depend on your entity type

For S corporations, record an owner's retirement contributions under Payroll: Employee Benefits, because an S corp can deduct retirement contributions made through payroll. For sole proprietors, retirement contributions are personal: money moved into or withdrawn to fund a retirement account is recorded as an Owner's Distribution.