What expense category is Pax8 Expenses?

For Managed Service Providers (MSPs) and IT professionals, a cloud commerce marketplace like Pax8 is a vital hub for sourcing, billing, and managing cloud solutions for their clients. Because Pax8 acts as a distributor for products like Microsoft 365, security software, and backup solutions, the accounting treatment for these costs is different from a typical software subscription. Understanding how to correctly categorize Pax8 expenses is fundamental for accurately calculating gross profit and ensuring tax compliance.

This article will explain the proper expense categories for Pax8 purchases, key considerations for classification, common examples, their tax implications, and how Fyle can automate tracking for these critical business costs.

Pax8 Expense Category

The way you categorize expenses from Pax8 depends entirely on one crucial question: 

Who is the end user of the product you purchased?

Cost of Goods Sold (COGS)

This is the primary and most accurate category for the vast majority of your Pax8 spending. When you purchase a software license or cloud service through Pax8 to resell or provide directly to a client, it is considered a direct cost of the service you are providing. According to IRS Publication 334, the cost of merchandise you buy for resale is included in the Cost of Goods Sold. These are not treated as regular operating expenses.

Software Subscriptions or IT Expenses

This category should be used for any software or service purchased through Pax8 that is for your business's own internal use. For example, if you buy a security tool to protect your own company's network or a project management tool for your technicians, that is a standard operating expense.

Important Considerations While Classifying Pax8 Expenses

Resale vs. Internal Use

This is the most critical factor. Before classifying any Pax8 expense, determine if the license or service is for a client or for your own company. Client-facing products go into COGS; internal products go into Operating Expenses (OpEx).

Clear Recordkeeping is Essential

You must maintain clear, itemized invoices from Pax8 and keep records showing which licenses and services are assigned to which clients. This documentation is your proof for justifying the COGS classification during a financial review or tax audit.

The Principle of Matching

The use of COGS is based on the accounting principle of matching costs with the revenue they generate. The cost of a Microsoft license you buy for a client should be recognized in the same period as the revenue you earn from that client for that license.

Digital "Inventory"

While you aren't holding physical inventory, the costs of the digital licenses you purchase for resale are treated as part of your "purchases" for the COGS calculation.

Examples of Pax8 Expenses

Classified as Cost of Goods Sold (COGS)

• Purchasing 25 Microsoft 365 Business Premium licenses that you will manage and bill to Client A.
• Buying a SentinelOne security license that will be deployed on Client B's network.
• Purchasing cloud backup solution licenses for multiple clients you support.

Classified as an Operating Expense (e.g., Software Subscriptions)

• Buying a license for an internal productivity tool from the Pax8 marketplace for your own technicians to use.
• Purchasing a security solution through Pax8 to protect your own MSP's internal network and servers.

Tax Implications of Pax8 Expenses

Cost of Goods Sold (COGS)

When classified as COGS, the expense is a direct reduction from your gross receipts to calculate your gross profit. For sole proprietors, this calculation is done in Part III of Schedule C (Form 1040). A cost included in COGS cannot be deducted again as a business expense in Part II of Schedule C. This provides a more accurate picture of your business's profitability on services rendered.

Operating Expense

When a tool is purchased for internal use, the cost is deducted as an operating expense on your tax return. For sole proprietors, this would be on Schedule C, Part II, under a category like "Other expenses" with a description like "Software Subscriptions."

Recordkeeping for Tax Audits

The IRS requires businesses to maintain thorough records to substantiate COGS. Your Pax8 invoices, which itemize the products purchased, are critical documents.

How Fyle Can Automate Expense Tracking for Pax8

Managing the high volume of license purchases and allocating them to the correct clients can be a significant administrative burden. Fyle's expense management platform automates this process, providing clarity and control.

• Track All Payments: Fyle can capture all payments made to Pax8 through a company credit card, ensuring no cost is missed and reconciliation is simplified..
• Centralized Invoice Management: Automatically fetch detailed, itemized invoices from Pax8's billing emails and attach them to the corresponding transaction in Fyle. This is crucial for distinguishing between different products and their intended end-users.
• Project Tracking for Client Allocation: This is a key feature for MSPs. Use Fyle’s project tracking to assign each license or software purchase to a specific end client. This creates a clear, real-time audit trail for COGS classification and helps in accurately billing your clients.
• Smart Categorization: Create rules in Fyle to streamline bookkeeping. For example, a transaction tagged with a client's project name can be automatically categorized as "COGS - Software Resale," while a transaction without a client project can be flagged for review or categorized as "OpEx - Internal Software."
• Seamless Accounting Integration: Fyle offers direct, two-way integrations with accounting software like QuickBooks, Xero, NetSuite, and Sage Intacct. This ensures that your Pax8 costs are accurately synced to the correct accounts—posting resale costs to COGS and internal use costs to the appropriate expense account—without manual data entry.

By leveraging Fyle, MSPs can transform the complex task of tracking and allocating cloud product costs into a simple, automated, and compliant process.