what is an operating expense 
an operating expense is an expense that a business incurs through its normal business operations often abbreviated as opex operating expenses include rent equipment inventory costs marketing payroll insurance and funds allocated for research and development investopedia crea taylorunderstanding operating expensesoperating expenses are the costs that a company incurs while performing its normal operational activities operational activities are those tasks that must be undertaken from day to day to operate the business and generate revenue operating expenses are different from expenses relating to for example investing in projects and borrowing operating expenses can differ according to what a company does in fact some activities and expenses might be considered operational in one industry but not so in another it s important to understand the distinction due to the tax deductibility of operating expenses some common types of operating expenses include one of the 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 the first four of the above listed costs are usually counted as operating costs interest expenses and income taxes are not operating expenses can be fixed or variable a fixed cost is set for a fixed period of time it doesn t change it typically relates to recurring expenses such as rent interest payments insurance payments and bank fees it isn t affected by the production levels of goods and services a variable cost can change depending on the production and sales levels of products or services a company can better manage its operating expenses when its managers understand the difference between its fixed and variable costs operating vs non operating expensesa 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 1examplehere s a look at a simple income statement that shows the operating expenses for a company source harvard business school online2opex vs capexabbreviated as capex capital expenditures are purchases that a business makes as an investment capital expenditures include costs related to acquiring maintaining 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 and trademarks the irs treats capital expenses differently than it treats 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 1for 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 1