Expensing vs. Depreciating

• Operating Expenses
  Operating expenses are those expenses every business has, like rent, equipment rental, utilities, supplies, postage, dues and subscriptions....you get the idea. Operating expenses are important because they reduce the taxable income of the business; they are "deductible." In order to be deductible, expenses must be:
  
  • ordinary and necessary to the operation of the business
    
  • spent during the current year
    
  • reasonable in amount (which is why meals and entertainment expenses are limited)
    
  • and directly related to the business.
  
  

• Depreciation of Assets
  Long-term assets that are used in a business can be deductible through the process of depreciation. That is, the cost of the asset is spread over a period of time, as determined by the useful life of that asset. For tax purposes, these assets are called "capital expenses."