How to Find Operating Expenses on an Income Statement

On a multi-step income statement, you find operating expenses on the income statement in the middle block: start at gross profit, read downward, and everything listed before you reach operating income (sometimes labeled “income from operations”) is an operating expense. They usually appear under a heading like “Selling, General, and Administrative Expenses” (SG&A), or broken into subcategories such as selling expenses, administrative expenses, and research and development.

First, Check Which Format You Are Reading

Before you go hunting, figure out whether the statement is multi-step or single-step. It changes everything about where to look.

A multi-step statement layers the math. Revenue at the top, then cost of goods sold, then a gross profit subtotal. Operating expenses come next as their own block, followed by an operating income subtotal. Non-operating items like interest and taxes sit below that. Because the format is layered, the operating expenses are grouped for you in a labeled section.

A single-step statement does none of that layering. It adds up all revenue and gains, subtracts all expenses and losses in one pass, and lands at net income. Operating expenses are not separated from cost of goods sold or interest. If that is what you are reading, you will need to identify the operating line items by name and add them yourself.

Most publicly traded companies file multi-step statements. SEC Regulation S-X, Rule 5-03 prescribes the sequence: net sales, then cost of goods sold, then operating costs and SG&A, then non-operating income and interest expense lower on the page.¹ Small private businesses sometimes use the single-step format because it is simpler to prepare.

The Exact Location on a Multi-Step Statement

Picture the page flowing top to bottom in a fixed order:

Revenue
Cost of goods sold
Gross profit (first subtotal)
Operating expenses (the section you want)
Operating income (second subtotal)
Interest, investment income, gains and losses, income taxes
Net income

Operating expenses live in the band between those two subtotals. They may appear as a single SG&A line, or be broken into selling and administrative expenses, sometimes with separate lines for research and development, depreciation, or provision for doubtful accounts. Once all the operating expense lines are listed, their total is subtracted from gross profit to produce operating income.

An easy way to know you have gone too far: if you are looking at interest expense or income taxes, you have scrolled past the operating section. SEC rules require interest expense and amortization of debt discount to appear on the face of the income statement rather than being buried in a footnote, which makes them a reliable landmark for spotting the boundary.¹

What the Line Items Typically Look Like

Labels vary by company, but the same categories show up again and again. If you see several of these clustered between gross profit and operating income, you are in the right place.

Rent and occupancy costs for office space, retail locations, or warehouses that are not part of the production floor.
Salaries and wages for employees outside manufacturing, including accounting, human resources, legal, and executive staff. Stock-based compensation for these employees is recorded in the same functional category as their cash pay.
Marketing and advertising, from digital ad spend to trade show costs.
Utilities and office supplies, including electricity, internet, phone service, and everyday office materials.
Insurance premiums for general liability, property coverage, directors and officers policies, and similar protections.
Professional fees paid to outside lawyers, auditors, consultants, and other specialists.
Research and development. Under U.S. accounting standards, R&D is expensed in the period it occurs. Technology and pharmaceutical companies often show R&D as one of their largest lines.
Provision for doubtful accounts, meaning the estimate of customer receivables the company does not expect to collect. SEC rules list this as a separate caption within operating expenses.¹

Not every company uses the same labels. One firm’s “general and administrative expenses” may bundle items that another firm breaks out on separate lines. When a label is ambiguous, look at the footnotes: companies are required to disclose what is included in each major caption.

Where Depreciation and Amortization Sit

Depreciation and amortization confuse people more than any other operating expense. They are the gradual write-down of physical assets (depreciation) and intangible assets like patents or software (amortization). No cash leaves the company when they are recorded. The cash went out years ago when the asset was bought. But they still reduce operating income in the current period.

Placement varies. Some companies fold depreciation into SG&A or cost of goods sold without breaking it out. Others put it on its own line in the operating section. When it is embedded elsewhere, you will often see language like “cost of goods sold (exclusive of depreciation shown separately below).” Either way, the portion tied to non-production assets belongs in operating expenses.

What Does Not Count as an Operating Expense

The most common mistakes happen at the edges of the operating block. Three things sit close by and get miscounted.

Cost of Goods Sold

COGS appears above gross profit, not below it. It covers raw materials, direct production labor, and manufacturing overhead. That is the cost of making the product, not the cost of running the business. Adding COGS into your operating expense figure inflates the number and makes back-office spending look worse than it is.

Interest Expense and Income Taxes

Both sit below operating income. Interest reflects how much the company borrowed and at what rate, which is a financing decision rather than an operational one. Income taxes depend on jurisdiction and tax strategy. Including either would obscure the underlying cost of generating revenue, and separating them is the whole point of calculating operating income in the first place.

One-Time Charges

Restructuring costs, asset write-downs, lawsuit settlements, and gains or losses from selling a division sometimes appear inside the operating section, and companies are allowed to put them there. Analysts often strip them out when evaluating ongoing performance, but if you are simply reading the statement as filed, they are counted in the operating total.

Older textbooks reference “extraordinary items” as a separate category. That classification was eliminated from U.S. GAAP in 2015, so you will not see it on any current statement.² Unusual or infrequent items still exist, but they are reported within the regular income statement rather than in a segregated section.

How to Total Them Up

Many multi-step statements, especially 10-K filings, show a subtotal for total operating expenses. If it is there, read the number and you are finished.

If no subtotal is provided, add every line item between gross profit and operating income. Then check your work: subtract your total from gross profit and see whether the result matches the operating income figure on the statement. If it does not match, you have either missed a line item or accidentally pulled in something from the non-operating section below.

One caution on terminology. Operating income and EBIT are often used interchangeably, but they are not always the same number. EBIT can include non-operating gains and losses (such as income from a minority investment) that sit outside the operating section. Operating income is a formal GAAP line item; EBIT is not. When the two differ, anchor on operating income, since it ties directly to the section you are trying to identify.

The related metric EBITDA (earnings before interest, taxes, depreciation, and amortization) starts with operating income and adds depreciation and amortization back in. If a company reports both operating income and EBITDA, the gap between them tells you how large the depreciation and amortization charges were.