What is Capital Expenditure?
A capital expenditure is spending on assets that will benefit the business for more than a year, such as equipment, vehicles or building improvements.
Capital expenditures, or CapEx, are recorded as assets rather than expenses because they provide value over several years. Their cost is recovered through depreciation or amortization, or through elections that allow faster deductions.
Examples
- Buying machinery, vehicles or computers
- Major renovations or improvements that better, restore or adapt property
- Purchasing software licenses with multi-year use
- Acquiring another business's assets
Repairs vs improvements
The line between a deductible repair and a capital improvement is set by the IRS tangible property regulations. Fixing a broken window is generally a repair; replacing the entire roof is generally an improvement. Safe harbors, such as the de minimis safe harbor and the routine maintenance safe harbor, help classify many costs.
Tax recovery options
Capital expenditures can be recovered through regular depreciation, section 179 expensing or bonus depreciation, depending on the asset and your preparer's choices.
In budgeting and cash planning
CapEx uses cash without appearing as an expense on the profit and loss, so it belongs in the cash forecast and the investing section of the cash flow statement. Many businesses keep a separate capital budget for planned purchases.
In the books
Record each capital purchase in the fixed asset register with the date placed in service, total cost including delivery and installation, and any financing.
Compare with operating expenses.
Related terms
- Amortization: Amortization spreads the cost of an intangible asset, or the repayment of a loan, over time.
- Assets: Assets are resources a business owns or controls that are expected to provide future economic benefit.
- Operating Expenses: Operating expenses are the costs of running a business that are not directly tied to producing the goods or services sold.
- Cash Flow Statement: The cash flow statement shows how cash moved into and out of a business, grouped into operating, investing and financing activities.
Browse more definitions in the small business glossary.
FAQs
Frequently asked questions
Is a new roof a repair or a capital expenditure?
Replacing an entire roof is generally a capital improvement, while patching a leak is generally a repair. The tangible property regulations set the rules.
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