What is Operating Expenses?
Operating expenses are the costs of running a business that are not directly tied to producing the goods or services sold.
Operating expenses, often called overhead or OPEX, are the ongoing costs of running the business: rent, salaries of administrative staff, marketing, software, insurance, utilities, professional fees and similar items. They are shown below gross profit on the profit and loss.
Operating vs direct costs
Direct costs, such as materials and production labor, go to cost of goods sold. Operating expenses support the business as a whole. The line can vary by industry: delivery drivers may be a direct cost for a logistics business but overhead for a retailer. Choose a treatment and apply it consistently.
Operating vs capital expenditures
Buying equipment or making major improvements is generally a capital expenditure, recorded as an asset and depreciated, rather than an operating expense, unless an election such as the de minimis safe harbor applies.
Deductibility
For tax purposes, business expenses must generally be ordinary and necessary to be deductible; see ordinary and necessary expenses. Some, such as meals, are only partly deductible, and others, such as entertainment, generally are not. The IRS's Publication 334 describes common business expenses.
Managing operating expenses
- Group them into a manageable number of accounts that mirror your tax return lines
- Review recurring subscriptions quarterly
- Compare monthly against budget; see small business budgeting
- Watch overhead as a percentage of revenue over time
See also how to read a profit and loss statement.
Related terms
- Cost of Goods Sold: Cost of goods sold is the direct cost of the products a business sold during a period.
- Gross Profit: Gross profit is revenue minus cost of goods sold, before operating expenses.
- Capital Expenditure: A capital expenditure is spending on assets that will benefit the business for more than a year, such as equipment, vehicles or building improvements.
- Ordinary and Necessary Expenses: Ordinary and necessary is the basic test a business expense must meet to be deductible.
Browse more definitions in the small business glossary.
FAQs
Frequently asked questions
Is payroll an operating expense?
Administrative and sales payroll usually is. Wages for workers who directly produce goods or deliver services may be included in cost of goods sold or cost of sales.
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