CapEx

What is capital expenditure?

You may have heard the term “capital expenditure”—or CapEx—and wondered how it differs from other types of business spending. A capital expenditure is the purchase of major assets, like property or equipment, by a company to grow the business and invest in long-term goals. These expenses are typically substantial for the business, but the purchases are made with the expectation that the benefits will outweigh the costs in the long term.

CapEx is one way that businesses reinvest funds to safeguard their long-term success and promote business growth, but these purchases are separate from other types of investments, such as operational expenditures. These expenses are accounted for differently on balance sheets and cash flow statements, so it’s important to understand how they vary from one another. 

Unlike other types of spending, which are considered expenses, capital expenditures are considered assets since they invest in the long-term health of the company.

Capital expenditures are also sometimes called “capital investments.” Unlike other types of spending, which are considered expenses, capital expenditures are considered assets since they invest in the long-term health of the company.

FAQs

What are the most common capital expenditures?

There are many types of capital expenditures that an average company must incur. Some of the most common include:

• Real estate
• Equipment
• Intellectual property
• Vehicles
• Technology

Is a CapEx tax deductible?

While capital expenditures are not necessarily tax deductible for the year of purchase, they are reportable as an expense through depreciation over time.

How do I tell if an expense is a capital expenditure or an operating expenditure?

There are no hard and fast rules, but typically assets are considered capital expenditures if it has a useful life greater than a year. Anything less is generally considered to be a part of your business’ operating expenditures.

What is the benefit of investing in a capital expenditure?

While the up-front cost of a capital asset is great, the high price often yields greater rewards down the road. Think of a capital expenditure as an investment in your company’s future success, rather than a solution to an immediate problem.

How is CapEx different from OpEx?

The primary difference between capital expenditures and operating expenses—commonly shortened to OpEx—is that operational costs are short-term expenses, not long-term investments. Operating expenses typically include purchases that are critical to the day-to-day operations of the business, such as supplies, rent and utility payments, and payroll expenses. 

How do you calculate CapEx?

When companies calculate CapEx, they’re looking at the initial investment amount, spread across the life of the asset, and factoring in things like expenses for maintenance and how much the value of the asset has depreciated over time. 

You can calculate the CapEx value of tangible, fixed assets by taking the current value of those assets, subtracting the value of those assets from the prior period, and adding the estimated amount of depreciation for those same assets. Expressed as a formula, it looks like this:

Asset value (current period) – Asset value (prior period) + depreciation = CapEx

Where do you list CapEx on a balance sheet?

CapEx investments are typically listed on a balance sheet under PP&E (property, plant, and equipment). It may also sometimes be classified as “capital spending” or “acquisition expenses.”