Depreciation is included in SG&A when the underlying asset supports selling, general, or administrative work: a corporate headquarters, office computers, delivery trucks, sales showroom fixtures, finance-department servers. Depreciation on factory buildings and production equipment is not in SG&A. That cost gets absorbed into inventory and reaches the income statement later, as part of cost of goods sold. The classification follows what the asset does, not what type of asset it is.
What SG&A Depreciation Actually Covers
Selling, general, and administrative expenses are the operating costs of running the business that aren’t tied to making the product. Under GAAP’s functional classification, depreciation follows the asset it belongs to. If that asset serves a selling, general, or administrative activity, its depreciation is a period cost and hits SG&A in the period it’s incurred.
General and administrative depreciation covers assets used by management and corporate support. Think headquarters buildings, office furniture, desktop computers in accounting, and servers running email and ERP systems. A $500,000 corporate server depreciated over five years produces $100,000 of G&A expense per year on a straight-line basis.
Selling depreciation covers assets tied to distribution and sales. Delivery trucks, warehouse racking for finished goods, trade show displays, and showroom fixtures all sit here. A fleet of delivery vehicles generates selling expense rather than a production cost, because those trucks move finished products to customers, not raw materials through a factory.
Both types land on the same SG&A line externally. Internal management reports usually track them separately, but published financial statements typically combine them.
Depreciation That Goes to Cost of Goods Sold Instead
Depreciation on manufacturing assets takes a different path. Rather than expensing directly to the income statement, it gets capitalized into inventory as a product cost.
ASC 330, the GAAP standard for inventory, requires manufacturers to use full absorption costing. The cost of finished goods must include raw materials, direct labor, and a share of manufacturing overhead, and depreciation on production equipment and the factory building is part of that overhead. Depreciation on an assembly line robot, a factory’s HVAC system, or quality-testing equipment gets embedded into the cost of each unit produced.
That cost doesn’t hit the income statement until the units sell. When they do, the accumulated cost, including the embedded depreciation, moves from the inventory account on the balance sheet to cost of goods sold. The mechanism matches the expense to the revenue it helped generate.
A concrete example: a machine costs $100,000 and depreciates at $10,000 per year. That $10,000 is allocated across every widget the machine produces that year. If the company sells 70% of those widgets, only $7,000 of the depreciation reaches cost of goods sold. The other $3,000 stays on the balance sheet inside unsold inventory until those units are sold.
The R&D Exception
There’s a third bucket that’s easy to miss. Under ASC 730-10-25-2, depreciation on equipment and facilities used for research and development is classified as R&D expense, not SG&A and not cost of goods sold. If a company builds a lab or buys specialized testing equipment solely for developing new products, the depreciation on those assets goes to the R&D line.
This matters because many companies report R&D as a separate operating expense line. Putting lab equipment depreciation into G&A would understate R&D spending and overstate administrative overhead.
Assets often serve double duty in practice. A piece of equipment used partly for R&D and partly for production gets its depreciation allocated by usage, with each portion sent to the appropriate functional category.
Service Companies Versus Manufacturers
For a pure service business with no manufacturing operations, nearly all depreciation flows through SG&A. A consulting firm, a SaaS company, or a law practice has no factory and no production overhead to absorb. Depreciation on office space, laptops, and furniture is a straightforward G&A expense. For these businesses, the answer to whether depreciation belongs in SG&A is almost always yes.
Manufacturers face a real allocation exercise. They have to track which assets serve production versus corporate functions and split the depreciation accordingly. A building that houses both the factory floor and executive offices needs an allocation, usually by square footage. The production share is capitalized into inventory; the office share is expensed to SG&A. Getting this split wrong distorts both gross margin and operating expenses, and auditors watch it closely.
Retailers and distributors sit in between. They don’t manufacture, so GAAP mostly treats their asset depreciation as SG&A, though tax rules may require capitalization into inventory anyway.
Finding Total Depreciation on the Income Statement
Because functional presentation scatters depreciation across multiple lines, the income statement usually won’t show a single total. SEC registrants follow Regulation S-X, Rule 5-03, which lists “costs and expenses applicable to sales and revenues” and “selling, general and administrative expenses” as separate captions without requiring a standalone depreciation line.1eCFR. 17 CFR 210.5-03 – Statements of Comprehensive Income
Two places carry the full number. The statement of cash flows adds total depreciation and amortization back to net income in the operating activities section under the indirect method, since it’s a non-cash charge. That addback covers the entire year’s depreciation regardless of where it lives functionally. The notes to the financial statements also typically disclose total depreciation and the company’s depreciation policies.
Some companies choose to present depreciation and amortization as its own line on the income statement rather than embedding it in functional categories. SEC Staff Accounting Bulletin Topic 11.B addresses companies that exclude manufacturing depreciation from the cost of sales caption, requiring clear disclosure so readers understand the presentation. This choice is less common but shows up often among companies that emphasize EBITDA-style metrics.
Amortization of Intangibles Follows the Same Rule
The same functional logic applies to amortization of intangible assets. Depreciation covers tangible assets like buildings and equipment; amortization covers intangibles like patents, trademarks, customer lists, and software licenses.
A patent protecting a production process would logically belong in cost of goods sold. Amortization of a customer relationship intangible or a trademark used in marketing would go to SG&A. Software licenses used by the accounting team produce G&A amortization. In practice, many companies default to reporting intangible amortization inside SG&A or on a separate operating expense line, especially for intangibles picked up in acquisitions where the functional allocation is less obvious.
When reading a company’s SG&A, it’s worth checking whether the line includes significant intangible amortization. A recent large acquisition can inflate SG&A with amortization of acquired intangibles, a cost that will decline as those intangibles fully amortize and one that doesn’t reflect what it actually costs to run the business day to day.