
Operating Expense
An operating expense is an expense a business incurs through its normal business operations. In general, businesses are allowed to write off operating expenses for the year in which the expenses were incurred; alternatively, businesses must capitalize capital expenses/costs. All these expenses can be considered operating expenses, but when determining operating income using an income statement, interest expenses and income taxes are excluded. Income statements typically categorize expenses into six groups: cost of goods sold; selling, general, and administrative costs; depreciation and amortization; other operating expenses; interest expenses; and income taxes. According to the IRS, operating expenses must be ordinary (common and accepted in the business trade) and necessary (helpful and appropriate in the business trade).

What Is an Operating Expense?
An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX, operating expenses include rent, equipment, inventory costs, marketing, payroll, insurance, step costs, and funds allocated for research and development.




Understanding Operating Expenses
One of the typical responsibilities that management must contend with is determining how to reduce operating expenses without significantly affecting a firm's ability to compete with its competitors.
Operating expenses are necessary and unavoidable for most businesses. Some firms successfully reduce operating expenses to gain a competitive advantage and increase earnings. However, reducing operating expenses can also compromise the integrity and quality of operations. Finding the right balance can be difficult but can yield significant rewards.
An income statement tracks the income and expenses of a company over a certain period to provide an image of its profitability. Income statements typically categorize expenses into six groups: cost of goods sold; selling, general, and administrative costs; depreciation and amortization; other operating expenses; interest expenses; and income taxes. All these expenses can be considered operating expenses, but when determining operating income using an income statement, interest expenses and income taxes are excluded.
Operating vs. Non-Operating Expenses
By contrast, a non-operating expense is an expense incurred by a business that is unrelated to the business's core operations. The most common types of non-operating expenses are interest charges or other costs of borrowing and losses on the disposal of assets. Accountants sometimes remove non-operating expenses to examine the performance of the business, ignoring the effects of financing and other irrelevant issues.
The Internal Revenue Service (IRS) allows businesses to deduct operating expenses if the business operates to earn profits. However, the IRS and most accounting principles distinguish between operating expenses and capital expenditures.
OPEX vs. CAPEX
Abbreviated as CAPEX, capital expenses are purchases that a business makes as an investment. Capital expenditures include costs related to acquiring or upgrading tangible and intangible assets. Tangible business assets include real estate, factory equipment, computers, office furniture, and other physical capital assets. Intangible assets include intellectual property, copyrights, patents, trademarks, et. al.
The IRS treats capital expenses differently than operating expenses. According to the IRS, operating expenses must be ordinary (common and accepted in the business trade) and necessary (helpful and appropriate in the business trade). In general, businesses are allowed to write off operating expenses for the year in which the expenses were incurred; alternatively, businesses must capitalize capital expenses/costs.
For example, if a business spends $100,000 on payroll, it can write off the entirety of that expense the year it is incurred, but if a business spends $100,000 buying a large piece of factory equipment or a vehicle, it must capitalize the expense or write it off over time. The IRS has guidelines related to how businesses must capitalize assets, and there are different classes for different types of assets.
What Is a Non-Operating Expense?
A non-operating expense is a cost that is unrelated to the business's core operations. The most common types of non-operating expenses are interest charges or other costs of borrowing and losses on the disposal of assets. Accountants sometimes remove non-operating expenses to examine the performance of the business, ignoring the effects of financing and other irrelevant issues.
What Are Capital Expenses?
CAPEX include costs related to acquiring or upgrading capital assets such as property, plant, and equipment. These expenses, unlike operating expenses, can be capitalized for tax purposes.
What Is the Difference Between Capital and Operating Expenses?
The Internal Revenue Service (IRS) allows businesses to deduct operating expenses if the business operates to earn profits. However, the IRS and most accounting principles distinguish between operating expenses and capital expenses. According to the IRS, operating expenses must be ordinary (common and accepted in the business trade) and necessary (helpful and appropriate in the business trade).
In general, businesses are allowed to write off operating expenses for the year in which the expenses were incurred. However, businesses must capitalize capital expenses/costs or write them off over time. The IRS has guidelines related to how businesses must capitalize assets, and there are different classes for different types of assets.
Related terms:
Accounting
Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business to oversight agencies, regulators, and the IRS. read more
Active Asset
An active asset can be a tangible or intangible asset used by a business in its daily or routine business operations. read more
Capital Expenditure (CapEx)
Capital expenditures (CapEx) are funds used by a company to acquire or upgrade physical assets such as property, buildings, or equipment. read more
Capitalize
To capitalize is to record a cost/expense on the balance sheet for the purposes of delaying full recognition of the expense. In general, capitalizing expenses is beneficial as companies acquiring new assets with long-term lifespans can amortize the costs. read more
Income Statement : Uses & Examples
An income statement is one of the three major financial statements that reports a company's financial performance over a specific accounting period. read more
What Is the Internal Revenue Service (IRS)?
The Internal Revenue Service (IRS) is the U.S. federal agency that oversees the collection of taxes—primarily income taxes—and the enforcement of tax laws. read more
Non-Operating Expense
A non-operating expense is an expense incurred by a business that is unrelated to its core operations. read more
Operating Income Before Depreciation and Amortization (OIBDA)
Operating Income Before Depreciation and Amortization (OIBDA) shows a company's profitability in its core business operations. read more
Operating Cost
Operating costs are expenses associated with normal day-to-day business operations. read more