What is a Capital Expenditure (CAPEX)?
Capital expenditure (CAPEX) is money that is spent to acquire, repair, update, or improve a fixed company asset, such as a building, business, or equipment. A CAPEX is different from an everyday business expense.
Often referred to as an operating expense, or OPEX, such as the purchase of advertising or toner cartridges. The major differences are that a CAPEX is a one-time cash outlay, not recurring, and it impacts a long-term asset, or something that can’t be deducted in full in the year in which it was bought. A new personal printer can be fully written off as an expense when you buy it but a new roof for your offices cannot be – that’s a major expenditure, or CAPEX.
OPEX are generally deducted from revenue as an expense and the profits that are left over are invested in CAPEX, to create future growth and opportunity.
What is Useful Life
A CAPEX is amortized, or its value is deducted a little each year based on the total cost and its expected useful life. A car’s useful life is now considered to be five years, according to the IRS, while a new building’s is 39. So the cost of those assets is divided by their useful life to determine how much your business can deduct each year as depreciation.
That doesn’t mean that a car is expected to stop working in year six or that a building will crumble in year 40, only that for the IRS’ purposes, the value can be depreciated in that time span.
A CAPEX is one type of expenditure and it needs to fall into one of these categories to qualify as such:
- Acquiring, or buying, a fixed tangible, such as a building, or intangible asset, such as a patent or license
- Upgrading an existing asset to expand its capacity or capability, such as a computer network or major equipment
- Renovating an obsolete or non-functioning asset to make it usable
- Repairing an asset to make it usable once again
- Adapting an asset for a new use, different from what it had been previously used for
- Starting or acquiring a new business
While OPEX are line items in the expense category on a cash flow statement, CAPEX are typically found under the heading, “Investment in property, plant, or equipment.”
CAPEX usually requires a sizeable financial investment and, for that reason, often needing the approval of the company’s board of directors or shareholders.