{"id":208448,"date":"2025-04-15T06:30:21","date_gmt":"2025-04-15T13:30:21","guid":{"rendered":"https:\/\/www.nationalfunding.com\/blog\/?p=208448"},"modified":"2025-03-28T15:36:39","modified_gmt":"2025-03-28T22:36:39","slug":"depreciation-is-an-operating-expense-needs-separating","status":"publish","type":"post","link":"https:\/\/www.nationalfunding.com\/blog\/depreciation-is-an-operating-expense-needs-separating\/","title":{"rendered":"Depreciation is an Operating Expense &#038; Needs Separating"},"content":{"rendered":"<p><span data-contrast=\"auto\">Yes, depreciation is an operating expense when you use the asset you\u2019re depreciating for your core business operations <\/span><a href=\"https:\/\/asc.fasb.org\/layoutComponents\/getPdf?isSitesBucket=false&amp;fileName=GUID-6B215AF2-4D04-4A7D-9110-D5EB4134B461.pdf\"><span data-contrast=\"none\">according to Generally Accepted Accounting Principles<\/span><\/a><span data-contrast=\"auto\"> (GAAP). Your core business is how you regularly generate revenue as opposed to other activities that create revenue on the side or sporadically.<\/span><span data-ccp-props=\"{&quot;335559738&quot;:240,&quot;335559739&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Depreciation can be a non-operating expense when the asset is not related to your core business. Examples include:<\/span><span data-ccp-props=\"{&quot;335559738&quot;:240,&quot;335559739&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"1\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">A cyber-security company buying a beach house as an investment.<\/span><span data-ccp-props=\"{&quot;335559738&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"1\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">An agricultural producer buying a logistics company where they shut down the transportation unit but keep the warehouse unit. The trucks from the now closed transportation unit would sit idle until sold, but the company would still expense depreciation as a non-operating expense.<\/span><span data-ccp-props=\"{&quot;335559739&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><span data-contrast=\"auto\">Large companies separate depreciation expenses directly related to cost of goods sold (COGS) from other depreciation expenses, while small businesses may lump all depreciation expenses together at tax time if they meet the <\/span><a href=\"https:\/\/www.federalregister.gov\/documents\/2021\/01\/05\/2020-28888\/small-business-taxpayer-exceptions-under-sections-263a-448-460-and-471\"><span data-contrast=\"none\">small business taxpayer exemptions<\/span><\/a><span data-contrast=\"auto\">.\u00a0<\/span><span data-ccp-props=\"{&quot;335559738&quot;:240,&quot;335559739&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Even if your small business meets the small business exemption, separating depreciation expense by operating activity (like a larger corporation does) may benefit your business.<\/span><span data-ccp-props=\"{&quot;335559738&quot;:240,&quot;335559739&quot;:240}\">\u00a0<\/span><\/p>\n<p aria-level=\"2\"><span data-contrast=\"auto\">The Benefits of Separating Depreciation Expense by Operating Activity<\/span><span data-ccp-props=\"{&quot;134245418&quot;:true,&quot;134245529&quot;:true,&quot;335559738&quot;:240,&quot;335559739&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Separating depreciation expenses by operating activity is good practice because it can help you run a more profitable business, by giving you deeper insight into your cost of goods sold (COGS) and making your business more appealing to lenders. Separating by operating activity means that, instead of combining all depreciation expenses for your business into a single line item, you allocate the expenses based on where they are used in operations:<\/span><span data-ccp-props=\"{&quot;335559738&quot;:240,&quot;335559739&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"4\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">COGS<\/span><span data-contrast=\"auto\">\u2014<\/span><span data-contrast=\"auto\">depreciation for machines and buildings used in your production of goods<\/span><span data-ccp-props=\"{&quot;335559738&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"4\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">R&amp;D<\/span><span data-contrast=\"auto\">\u2014<\/span><span data-contrast=\"auto\">for equipment and facilities used for research and development activities<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"4\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><span data-contrast=\"auto\">SG&amp;A<\/span><span data-contrast=\"auto\">\u2014<\/span><span data-contrast=\"auto\">for offices, equipment, and other assets used for sales and general administration<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"4\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"4\" data-aria-level=\"1\"><span data-contrast=\"auto\">Other depreciation<\/span><span data-contrast=\"auto\">\u2014<\/span><span data-contrast=\"auto\">for other assets not included in the above categories (check with your tax professional if you think an asset fits here.)<\/span><span data-ccp-props=\"{&quot;335559739&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><span data-contrast=\"auto\">Breaking out depreciation expenses into these activities instead of using a single line provides a clearer picture of your business operations. This will help you run a more profitable business and also make your business look more professional to third parties like lenders.<\/span><span data-ccp-props=\"{&quot;335559738&quot;:240,&quot;335559739&quot;:240}\">\u00a0<\/span><\/p>\n<h2 aria-level=\"3\"><span data-contrast=\"none\">Separating depreciation expenses for accurate COGS<\/span><span data-ccp-props=\"{&quot;134245418&quot;:true,&quot;134245529&quot;:true,&quot;335559738&quot;:240,&quot;335559739&quot;:240}\">\u00a0<\/span><\/h2>\n<p><span data-contrast=\"auto\">Tracking the depreciation expenses for machines, buildings, depreciating materials, and other items related to manufacturing separately from the depreciation for other assets lets you calculate more <\/span><a href=\"https:\/\/www.nationalfunding.com\/blog\/5-ways-accurate-cogs-helps-improve-profitability\/\"><span data-contrast=\"none\">accurate COGS, to help improve profitability<\/span><\/a><span data-contrast=\"auto\">. With accurate COGS, you\u2019ll be able to better determine:<\/span><span data-ccp-props=\"{&quot;335559738&quot;:240,&quot;335559739&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"2\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">If increasing or decreasing prices will generate more profit.<\/span><span data-ccp-props=\"{&quot;335559738&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"2\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">Whether you can or should give volume discounts.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"2\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><span data-contrast=\"auto\">Which growth options work based on your company\u2019s specific expenses.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"2\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"4\" data-aria-level=\"1\"><span data-contrast=\"auto\">How to prioritize cost-cutting efforts.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"2\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"5\" data-aria-level=\"1\"><span data-contrast=\"auto\">Who the best customers are and how to target them better.<\/span><span data-ccp-props=\"{&quot;335559739&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<h2 aria-level=\"3\"><span data-contrast=\"none\">Making your business more appealing to lenders<\/span><span data-ccp-props=\"{&quot;134245418&quot;:true,&quot;134245529&quot;:true,&quot;335559738&quot;:240,&quot;335559739&quot;:240}\">\u00a0<\/span><\/h2>\n<p><span data-contrast=\"auto\">Separating depreciation expenses by operating activity makes you a more appealing borrower because your company will stand out from others on 3 of the \u201c6 C\u2019s of credit.\u201d This is a standard list of elements lenders use when evaluating whether to approve you for a small business loan. The 3 of note here include:<\/span><span data-ccp-props=\"{&quot;335559738&quot;:240,&quot;335559739&quot;:240}\">\u00a0<\/span><\/p>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"3\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"1\" data-aria-level=\"1\"><b><span data-contrast=\"auto\">Character<\/span><\/b><span data-contrast=\"auto\">: You\u2019ll demonstrate command of your business with precise financial statements that give the lender confidence in your financial knowledge and your ability to execute operations.<\/span><span data-ccp-props=\"{&quot;335559738&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"3\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"2\" data-aria-level=\"1\"><b><span data-contrast=\"auto\">Conditions: <\/span><\/b><span data-contrast=\"auto\">Allocating depreciation to COGS lets you present a more thorough <\/span><a href=\"https:\/\/www.nationalfunding.com\/blog\/break-even-analysis\/\"><span data-contrast=\"none\">break-even analysis<\/span><\/a><span data-contrast=\"auto\"> for <\/span><a href=\"https:\/\/www.nationalfunding.com\/equipment-leasing\/\"><span data-contrast=\"none\">equipment financing<\/span><\/a><span data-contrast=\"auto\"> or <\/span><a href=\"https:\/\/www.nationalfunding.com\/small-business-loans\/inventory-financing-loans\/\"><span data-contrast=\"none\">inventory loans<\/span><\/a><span data-contrast=\"auto\"> because you\u2019ll have more accurate costs for the analysis.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"3\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" aria-setsize=\"-1\" data-aria-posinset=\"3\" data-aria-level=\"1\"><b><span data-contrast=\"auto\">Capacity<\/span><\/b><span data-contrast=\"auto\">: More accurate COGS (including depreciation) helps you run a more profitable business. This can get you better terms on loans because you\u2019ll have a greater capacity to repay the financing.<\/span><span data-ccp-props=\"{&quot;335559739&quot;:240}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><span data-contrast=\"auto\">Allocating depreciation across operating expenses can also improve your chances of loan approval by separating the effect of <\/span><i><span data-contrast=\"auto\">\u201ctrue operating activities\u201d<\/span><\/i><span data-contrast=\"auto\"> from tax decisions like <\/span><a href=\"https:\/\/www.nationalfunding.com\/blog\/a-guide-to-the-section-179-deduction-and-its-changes\/\"><span data-contrast=\"none\">Section 179<\/span><\/a><span data-contrast=\"auto\"> elections or bonus depreciation.\u00a0\u00a0<\/span><span data-ccp-props=\"{&quot;335559738&quot;:240,&quot;335559739&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Both of these lower your income and profit margin for the year vs. standard depreciation, which is applied over multiple years. A lender might not approve a loan if they focus on the year-over-year decline in profit without realizing it\u2019s the result of a tax decision that doesn\u2019t reflect your true cash flow.\u00a0<\/span><span data-ccp-props=\"{&quot;335559738&quot;:240,&quot;335559739&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">You can avoid this problem by giving your lender detailed financial reports that clearly show depreciation expenses for each business activity on your income statement. Then, explain how your tax choices affect your cash flow statement.<\/span><span data-ccp-props=\"{&quot;335559738&quot;:240,&quot;335559739&quot;:240}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">In almost all cases, depreciation is an expense related to running your business. Tracking depreciation for each specific part of your business can help you make more money and look good to lenders. If you have an asset that you think isn&#8217;t part of your main business activities, talk with your tax advisor to make sure you&#8217;re correctly recording its depreciation as a non-operating expense.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><i><span data-contrast=\"none\">National Funding does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.<\/span><\/i><span data-contrast=\"none\">\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Yes, depreciation is an operating expense when you use the asset you\u2019re depreciating for your core business operations according to Generally Accepted Accounting Principles (GAAP). Your core business is how you regularly generate revenue as opposed to other activities that create revenue on the side or sporadically.\u00a0 Depreciation can be a non-operating expense when the<a class=\"excerpt-read-more\" href=\"https:\/\/www.nationalfunding.com\/blog\/depreciation-is-an-operating-expense-needs-separating\/\" title=\"ReadDepreciation is an Operating Expense &#038; Needs Separating\">&#8230; Read more &raquo;<\/a><\/p>\n","protected":false},"author":38,"featured_media":208450,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[42],"tags":[],"class_list":["post-208448","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-managing-your-business"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.8 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Depreciation is an Operating Expense &amp; Needs Separating - The Bottom Line by National Funding<\/title>\n<meta name=\"description\" content=\"Yes, depreciation is an operating expense and small businesses can grow profits and appeal to lenders by allocating it to specific operating activities.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.nationalfunding.com\/blog\/depreciation-is-an-operating-expense-needs-separating\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Depreciation is an Operating Expense &amp; 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