To calculate total expenses on an income statement, add four categories together: cost of goods sold, operating expenses, non-operating expenses, and income taxes. That sum, subtracted from total revenue, gives you net income or net loss. The categories are the same whether you use a single-step or multi-step format; a multi-step statement just shows subtotals along the way.
Total Expenses = Cost of Goods Sold + Operating Expenses + Non-Operating Expenses + Income Taxes
The work is in getting each category complete before you add. Below is what belongs in each one, and the timing and documentation rules that decide which costs land on this period’s statement.
Cost of Goods Sold
Cost of goods sold covers everything directly tied to producing what you sell: raw materials, components, direct labor on the production line, and manufacturing overhead like factory utilities or equipment maintenance. Service businesses call this “cost of services” and include labor hours, subcontractor fees, and supplies consumed during service delivery. These costs move in proportion to sales volume, which is why they sit at the top of the expense section.
Pull these figures from inventory records, purchase orders, and payroll data for production staff. Direct wages are not the whole picture. Your share of Social Security (6.2%) and Medicare (1.45%) adds 7.65% on top of every dollar of production wages you pay.1Internal Revenue Service. Publication 926, Household Employer’s Tax Guide Health insurance premiums, retirement plan contributions, and workers’ compensation insurance further increase the true labor cost per employee, and all of it belongs in COGS when the employee works in production.
Operating Expenses
Operating expenses cover the day-to-day costs of running the business that aren’t directly tied to production: rent, utilities, office supplies, insurance premiums, administrative salaries, marketing spend, and professional fees for your accountant or attorney. On many income statements this line is labeled “selling, general, and administrative expenses” or SG&A.
Depreciation and Amortization
Two operating expenses get missed more than any others because no cash leaves your account when you record them. Depreciation spreads the cost of tangible assets like machinery, vehicles, and furniture over the years you use them.2Internal Revenue Service. Publication 946 (2024), How to Depreciate Property Amortization does the same for intangibles. Under federal law, acquired intangibles like goodwill, patents, trademarks, and customer lists are amortized over 15 years.3Office of the Law Revision Counsel. 26 USC 197 – Amortization of Goodwill and Certain Other Intangibles
Both reduce reported income even though no cash left the bank that period. Leaving them off overstates profit and creates problems at tax time.
Deciding What to Expense Now vs. Capitalize
If an asset benefits your business for more than one year, you generally capitalize it on the balance sheet and deduct its cost gradually through depreciation or amortization. A $40,000 delivery van doesn’t appear as a $40,000 expense in the month you buy it; you expense a portion each year over its useful life.
Federal tax law offers several elections that let you treat certain capital purchases as immediate expenses:
- De minimis safe harbor. Items costing $5,000 or less per invoice, or $2,500 if you don’t have audited financial statements, can be expensed immediately rather than capitalized.4Internal Revenue Service. Tangible Property Regulations – Frequently Asked Questions
- Bonus depreciation. For qualifying property acquired after January 19, 2025, businesses can deduct 100% of the cost in the first year under provisions signed into law on July 4, 2025.5Internal Revenue Service. One, Big, Beautiful Bill Provisions
- Section 179. For tax year 2026, businesses can elect to expense up to $2,560,000 in qualifying equipment and software purchases in the year they’re placed in service, with a phase-out beginning at $4,090,000 in total qualifying purchases.
These elections change how much expense hits your income statement in a given year. A business that uses bonus depreciation on a $200,000 equipment purchase reports $200,000 more in expenses that year than a business that depreciates the same equipment over seven years. Neither is wrong; the difference is timing. Your total expense number needs to reflect whichever method you’ve chosen.
Non-Operating Expenses
Below operating income sit costs that don’t come from your core business activities. The two biggest are interest expense and losses on asset dispositions.
Interest Expense
Interest payments on business loans, lines of credit, and corporate bonds are non-operating expenses. Pull the amounts from monthly loan statements or year-end summaries from your lender. The bank prime rate sits at 6.75% as of late 2025, and SBA 7(a) rates can run as high as the base rate plus 6.5% for loans under $50,000.6U.S. Small Business Administration. Terms, Conditions, and Eligibility
Federal law caps the deductibility of business interest expense at 30% of adjusted taxable income for the year.7Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense Businesses that meet the small business gross receipts exemption, roughly $31–$32 million in average annual receipts depending on the tax year, are excluded from the cap. Note that the cap affects the deductible interest on your tax return, not the interest expense reported on the income statement itself; the two can diverge.
Losses on Asset Sales
When you sell equipment, a vehicle, or another business asset for less than its book value, the difference is a loss that belongs in the non-operating section. A machine carried at $25,000 on your books that sells for $18,000 produces a $7,000 loss. Pull these figures from settlement statements or your fixed-asset ledger.
Income Taxes
Income tax expense is typically the last line before net income. C corporations pay a flat federal rate of 21% on taxable income.8Office of the Law Revision Counsel. 26 USC 11 – Tax Imposed Pass-through entities like S corporations, partnerships, and sole proprietorships don’t pay tax at the entity level; profits flow through to owners’ individual returns. Even so, income statements for pass-throughs often include a “provision for income taxes” line that estimates the tax burden on those profits.
State income taxes add another layer. Rates and structures vary, and some states impose franchise taxes or gross receipts taxes that function like income taxes but calculate differently. Your total tax expense should capture both federal and state obligations.
Cash vs. Accrual: When Expenses Count
Your accounting method decides which expenses land on this period’s income statement. Under the cash method, you record expenses when you actually pay them. Under the accrual method, you record expenses when you incur the obligation, regardless of when cash changes hands.9Internal Revenue Service. Publication 538 (01/2022), Accounting Periods and Methods If a supplier delivers $10,000 in materials in December but you pay in January, an accrual-basis business records the expense in December; a cash-basis business records it in January.
Most small businesses use the cash method because it’s simpler and aligns with bank statements. However, C corporations and partnerships with a C corporation partner must use accrual accounting if their average annual gross receipts over the prior three years exceed $32,000,000.10Office of the Law Revision Counsel. 26 USC 448 – Limitation on Use of Cash Method of Accounting That threshold is adjusted for inflation annually. For 2026, the figure is $32,000,000.11Internal Revenue Service. Revenue Procedure 2025-32
If you’re preparing an income statement and aren’t sure which method your business uses, check your most recent tax return; it’s declared on the first page. Switching methods, or picking the wrong one, shifts significant amounts between periods and produces a total expense figure that won’t match anyone else’s expectations.
Expenses That Get Missed
Total expense calculations go wrong less often from math errors than from missing line items. Check the categories above against this list before you add:
- Vehicle mileage. If you use a personal vehicle for business, the 2026 standard mileage rate is 72.5 cents per mile. A business owner driving 15,000 miles a year produces nearly $10,900 in deductible expense.12Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile, Up 2.5 Cents
- Home office. You can deduct a portion of rent or mortgage, utilities, and insurance if you use part of your home exclusively and regularly as your principal place of business. The key word is “exclusively.” A desk in the corner of a living room that doubles as a dining table doesn’t qualify.13Internal Revenue Service. Publication 587 (2025), Business Use of Your Home
- Employer payroll taxes. Beyond wages, you owe 7.65% in FICA taxes on every employee’s earnings, plus federal and state unemployment insurance. State unemployment tax rates and wage bases vary widely.1Internal Revenue Service. Publication 926, Household Employer’s Tax Guide
- Bad debt. If you use accrual accounting and a customer never pays an invoice, the uncollectible amount is an expense once you’ve made reasonable efforts to collect.
- Annual filing fees. Most states require LLCs and corporations to file annual reports with the secretary of state, with fees that range from nothing in some states to several hundred dollars in others.
Records That Support the Number
Federal law requires every taxpayer to keep records sufficient to show whether they owe tax.14Office of the Law Revision Counsel. 26 USC 6001 – Notice or Regulations Requiring Records, Statements, and Special Returns For businesses claiming expense deductions under Section 162, the practical consequence is simple: if you can’t document an expense, the IRS can disallow the deduction.15Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses Keep receipts, invoices, bank statements, and payroll records organized by category and period. The IRS generally has three years from the filing date to audit a return, and six if gross income is understated by more than 25%. Holding records for at least seven years gives you a comfortable margin. For depreciated assets, keep the purchase records until at least three years after you dispose of the asset and file the final return that includes it.
Once the categories are complete and the records are behind them, the math is addition. Cost of goods sold plus operating expenses plus non-operating expenses plus income taxes equals total expenses. Subtract that from total revenue, and the line below it is net income or net loss.