What type of expense are overhead costs?

What is the cost of overhead?

The cost of overhead includes all indirect expenses that support day-to-day operations. These are costs the business would still incur even if no products were being made or sold. Overhead ensures the company can function smoothly, covering things like office space, management, and general business administration.

How to categorize overhead costs

• Record as Operating Expenses on your income statement.
• Include in “Indirect Costs” or “Administrative Expenses” within your chart of accounts.
• Exclude direct costs like raw materials and production labor — those go under Cost of Goods Sold (COGS).
• Separate overhead into categories such as Fixed Overhead (e.g., rent, insurance) and Variable Overhead (e.g., utilities, office supplies).
• Track overhead regularly to measure efficiency and manage profitability.

Examples of overhead costs

• Rent or lease payments for office or warehouse space.
• Utilities like electricity, water, and internet.
• Administrative salaries and office staff wages.
• Insurance premiums (property, liability, or health).
• Office supplies and maintenance.
• Depreciation of office furniture or equipment.
• Professional services (accounting, legal, consulting).
• Software subscriptions and communication tools.

Tax implications for overhead costs

• Overhead expenses are fully tax-deductible as ordinary and necessary business costs.
• Indirect costs that support production (like factory rent or utility costs) can be partially included in COGS for manufacturing businesses.
• Capital expenditures (e.g., buying equipment or buildings) must be capitalized and depreciated, not deducted as overhead.
• Keep receipts, contracts, and documentation to justify each deduction.
• Consistent categorization of overhead helps improve financial reporting accuracy and tax compliance.