Operating expenses
The ongoing costs of running the business that aren’t tied directly to producing a sale — rent, utilities, admin salaries, software, marketing — reported below gross profit on the profit and loss statement.
What operating expenses means.
Operating expenses (OpEx) are the ongoing costs of running a business that are not tied directly to producing what it sells — rent, utilities, office salaries, software, insurance and marketing — reported below gross profit on the profit and loss statement.
The SEC’s small-business office, in its income-statement primer released September 2024: “Operating Expenses, also called selling, general, and administrative expenses, include the overhead costs of running the business that are not associated with the costs to produce products or provide services.” IRS Publication 583 (Rev. December 2024) defines expenses more broadly as “the costs you incur (other than the cost of inventory) to carry on your business.” On the P&L, revenue minus cost of goods sold gives gross profit, and gross profit minus operating expenses gives operating profit.
Why the OpEx line drives real decisions.
Operating expenses are the costs an owner can change month to month, so a clean, well-structured OpEx section is what makes the P&L a management tool rather than a tax artifact — you can see where money goes and what to adjust. That depends on a chart of accounts built for how the business actually operates.
Expenses scattered across overlapping accounts, personal spending mixed in, or direct costs misfiled as overhead all blur the picture — common cleanup corrections that, once fixed, make the operating section comparable period to period.
Operating expenses on a QuickBooks P&L: a worked example.
Illustrative figures, not a client file.
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Where the line falls
Take an online retailer with $50,000 of revenue for the month. The inventory sold and the freight to bring it in go to cost of goods sold: $27,000. Rent, software, bookkeeping, insurance and advertising go to operating expenses: $14,500. Gross profit is $23,000 and operating profit $8,500.
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One miscoding, two margins
If $6,000 of inventory purchases had been coded to a general Supplies expense, gross profit would read $29,000 and operating expenses $20,500. Operating profit stays $8,500, but gross margin moves from 46% to 58%, and every pricing decision built on it is wrong.
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What the report should look like
A P&L where each operating expense account means one thing, compared month over month, so a jump in software or advertising is visible on its own line instead of hiding in Miscellaneous.
How operating expenses go wrong in QuickBooks.
Direct costs filed as overhead
Materials, subcontractors or inventory booked to operating expenses, which overstates gross margin and understates the cost of each sale.
Catch-all accounts
Miscellaneous, Ask My Accountant or Uncategorized Expense holding thousands of dollars, so the operating section cannot be read line by line.
Personal and capital items expensed
Owner spending, loan principal or equipment purchases run through operating expenses, so the costs of running the business look higher than they are.
An operating section you can manage from
Monthly statements structured so the operating section guides decisions are TechBrot’s financial statements service; correcting past months is a cleanup. Whether a cost is deductible on a tax return is a separate question for your CPA or EA.
Operating expenses vs. cost of goods sold.
The line between them is direct vs. indirect. Cost of goods sold is the direct cost of what you sold — it rises and falls with sales. Operating expenses are indirect — you’d pay the rent and the admin salaries whether or not you made a sale this month. Drawing that line consistently is what makes gross margin and operating margin both mean something.
Operating expenses questions.
Is payroll an operating expense?
Office and administrative wages are. Wages for the people who produce what you sell, such as direct labor on a job, belong in cost of goods sold: the SEC’s income-statement primer lists “costs of direct labor” among the costs of goods sold.
Are operating expenses the same as tax-deductible expenses?
No. Operating expenses are a reporting category on the P&L. Whether a cost is deductible, and when, is decided by tax rules and worked out by your CPA or EA. TechBrot does not prepare or file tax returns; we work with your CPA or EA.
Can’t see where the money really goes?
A QuickBooks ProAdvisor reviews how your operating expenses are categorized and whether the P&L is helping or hiding the picture — written, fixed-fee scope.
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