If you earn income from a business or self-employment, it’s important to understand the difference betweenordinary operating expensesandcapital expenses. Operating expenses include the everyday costs of running your business—things like office supplies, utilities, and rent. Capital expenses, on the other hand, relate to assets that provide lasting value over time, such as equipment, computers, furniture, or machinery.

Why does this matter? The IRS treats these two categories differently. Ordinary operating expenses are generally deductible in the year you incur them, while capital expenses often need to be depreciated or deducted over several years. Mixing the two can cause confusion and even lead to missed deductions. To stay on top of your tax savings, track these expenses separately throughout the year and consult a tax professional if you’re unsure which category an item belongs in.