Key takeaways
- OpEx covers the regular costs of keeping the business open, whether you sell a lot or a little.
- OpEx is subtracted from gross profit to find operating income on a P&L.
- Ordinary and necessary operating costs are generally deductible in the year paid or incurred. See IRS: deducting business expenses.
- Purchases that last more than a year are capital expenditures, unless small enough to expense under the $2,500 de minimis rule.
What are operating expenses?
Operating expenses are what it costs to keep the lights on. They’re the bills that arrive every month and the small purchases that keep work moving. For a freelancer that might be software, a phone plan and a coworking desk. For a small shop it adds up to rent, staff wages, card fees and advertising.
OpEx is different from cost of goods sold, which covers the direct cost of products sold, and from capital expenditures, which buy long-lasting assets.
Track day-to-day operating costs from your phone with the Manage Receipt app.
Examples
| Category | Typical receipts |
|---|---|
| Rent and utilities | Office or studio rent, electricity, internet |
| Payroll | Staff wages, payroll taxes, benefits |
| Software | Subscriptions, cloud storage, design tools |
| Marketing | Ads, website hosting, printed flyers |
| Professional services | Accountant, lawyer, contractor fees |
| Insurance | Liability, business property, professional |
| Travel and meals | Flights, hotels, client meals (50% deductible) |
| Supplies and fees | Office supplies, bank and card fees, phone |
| Depreciation | Yearly share of equipment cost |
Many of these are overhead costs, the indirect expenses that don’t change much with sales. Others, like card fees or ad spend, grow as you sell more. Grouping receipts into a short, consistent list of categories makes OpEx easy to total each month and easy to compare year over year. If one category jumps, you’ll see it in the next report instead of at tax time.
OpEx vs CapEx
Ask two questions about any receipt:
- Does it last over a year?No: OpEx. A subscription, a repair, a box of paper.
- Is it $2,500 or less per item?With the de minimis safe harbor, you can still expense it like OpEx.
- OtherwiseIt’s CapEx: record it as an asset and depreciate it, or use Section 179 or bonus depreciation.
A $40 monthly design app is OpEx. A $5,000 commercial printer is CapEx. Fixing the printer is OpEx; adding a new finishing unit to it is likely CapEx.
How OpEx affects taxes
Ordinary and necessary operating expenses reduce your taxable profit in the year you pay or incur them. If you’re self-employed, they’re listed by category on Schedule C, and every dollar of OpEx you can prove lowers both income tax and self-employment tax.
Some OpEx has limits. Business meals are generally 50% deductible, entertainment generally isn’t deductible, and anything with a personal element, like a phone or home internet, is deductible only for the business-use share. Keep receipts showing the amount, date, vendor and business purpose.
Every OpEx receipt in the right bucket
Manage Receipt reads each receipt and sorts it into categories like software, rent, travel and supplies, so your operating expenses are grouped the way Schedule C and your P&L expect. Monthly reports show which OpEx categories are growing before they surprise you.
Explore AI Expense ReportsFrequently asked questions
Is rent an operating expense?
Yes. Rent for an office, shop, studio or warehouse is a classic operating expense, and it’s generally deductible in the year it applies. If you work from home, part of your home costs may count instead through the home office deduction, which has its own rules.
Is payroll OpEx?
Yes, for most businesses. Wages, payroll taxes and benefits for staff who run the business are operating expenses. The exception is direct labor for people who make the products you sell, which manufacturers and makers usually include in cost of goods sold instead.
Is depreciation an operating expense?
Yes. Depreciation is a non-cash operating expense: it spreads the cost of equipment and other assets across the years you use them. It appears with other operating expenses on the P&L even though no money leaves your account that year.
What is not an operating expense?
Cost of goods sold, capital purchases, loan principal repayments, owner draws and income taxes are not operating expenses. Interest on business loans is usually shown separately as a non-operating expense, below operating income on the P&L. Keeping these out of OpEx gives a truer picture of day-to-day running costs.