Is interest expense an operating expense?
Interest expense is a non-operating cost that represents the price of borrowing money. It affects a company’s financing structure, not its day-to-day business operations, and appears below operating income on the income statement.
Interest expense
Interest expense is not typically considered an operating expense. It’s classified as a non-operating expense because it relates to how a business is financed, not to its core operations. While it appears on the income statement, it’s listed below operating income, reflecting the cost of borrowing money rather than the cost of running the business.
What is interest expense?
Interest expense represents the cost incurred from borrowing funds through loans, credit lines, or other forms of debt. It’s an essential financial cost but doesn’t directly contribute to producing goods or providing services, which is why it’s treated separately from operating costs.
How to categorize interest expense
- Record as a Non-Operating Expense on the income statement, below operating income.
- Use an “Interest Expense” or “Finance Costs” account in your chart of accounts.
- Include interest paid on business loans, credit cards, equipment financing, and mortgages on business property.
- Do not confuse this with operating expenses, such as rent, payroll, or utilities, which are tied to day-to-day operations.
- Track separately from principal repayments, which are not deductible expenses.
Examples of interest expenses
- Interest on business loans or lines of credit.
- Interest on equipment or vehicle financing.
- Mortgage interest on commercial real estate.
- Credit card interest for business purchases.
- Interest on late tax payments or vendor financing arrangements.
Tax implications for interest expense
- Business-related interest is tax-deductible if the borrowed funds are used for business purposes.
- Deduct interest on Schedule C (for sole proprietors) or in the “Interest Expense” section of your business tax return.
- The business interest expense limitation may apply to larger businesses (generally 30% of adjusted taxable income), but small businesses are usually exempt.
- Personal loan or credit card interest is not deductible.
- Keep loan agreements, amortization schedules, and proof of payments as supporting documentation.
