CapEx vs OpEx: What’s the Difference?

Another difference lies in where each expense is found in the financial statements. Operational expenditures are immediately expensed to the income statement in the period they occur, whereas capital expenditures are capitalized as fixed assets on the balance sheet. The capitalization of capital expenditures then requires depreciation over the asset’s useful life, which can range from 3 years for software to 39 years for certain buildings.

How to Categorize CapEx vs OpEx

Understanding how to differentiate between CapEx and OpEx transactions is important to maintain compliance with regulatory agencies and generate accurate financial statements. The cost will be considered a CapEx transaction if it meets each of the following requirements:

• The item is expected to be used for more than one year.
• The item will generate economic benefits during its useful life.
• The item is a significant upfront investment, which is generally greater than $2,500.

Examples of capital expenses include buildings, land, machinery, equipment, certain software, office furniture, fixtures, leasehold improvements, and vehicles. Items that do not meet these criteria are generally considered operating expenses. Examples of operating expenditures include repairs, maintenance, advertising, small tools, and purchases that provide benefits for less than a year.

Examples of CapEx

Capital expenditures will look different for every company based on your industry. Nevertheless, here are examples of CapEx costs by asset class:

• Building – Any commercial property that your company owns. This does not include property that you rent. Rent payments are operational expenditures.
• Machinery & Equipment – Production equipment used to create products or services that will be used for more than one year.
• Furniture and Fixtures – Office furniture and fixtures that will be used more than one year and are over $2,500.
• Leasehold Improvements – Improving your building outside of normal repairs will need to be capitalized.
• Vehicles – Vehicles held in the company’s name.
• Software and Hardware – Certain computer software and hardware need to be capitalized. Consult with an accountant to determine if your software expense is a capital expenditure or an operating expense.
• Research and Development – Under new legislation, research and development costs are now capital expenditures, subject to amortization over five years in the United States.

When looking for capital expenditures, evaluate how long the item will be used and if the cost is significant. In addition, term investments, like contributions to a brokerage account or the purchase of another business, will be reported on the balance sheet.

Examples of OpEx

Operating expenses are costs that occur in the normal course of business and are commonly ongoing expenses. Here are a few examples of OpEx purchases:

• Repairs – Any repairs that are not of significant value are operating expenses.
• Maintenance – Regular maintenance, like painting, cleaning, and lawn care, are considered operational expenses.
• Supplies – Office supplies and small tools are operational costs. If the value of each item is immaterial, you can immediately expense the item to the income statement. For example, you might spend $3,000 on pens, but if each pen costs less than $1, the unit cost is immaterial and not a capital expenditure.

Other examples of operating expenditures include utilities, advertising, office rent, employee salaries, and insurance. OpEx spending is reserved for general business expenses, while CapEx spending is for large, one-time capital projects.

Tracking Operating and Capital Expenditures

Tracking the expenditures of your business is crucial for proper reporting. Let’s go through some strategies you can implement in your organization to maximize compliance, visibility, and efficiency.

Plan for CapEx Costs

CapEx costs can quickly become expensive. This makes it important to engage in the proper financial planning. First, you need to analyze what resources are available. If you do not have enough cash, determine how your money is being spent using the cash flow statement. Then, make a plan to save cash or secure financing to purchase the item.

You should also evaluate when you need the item. If your sales are rapidly increasing, can you wait six months to purchase a new piece of machinery? Understanding the specific needs of your organization is important for effective CapEx planning.

Have Defined Internal Processes

Another component of tracking operational and capital expenditures is having clear internal processes. Every team member, from purchasing to payables, needs to understand how to differentiate between capital and operational expenditures and the process that should be followed. For example, an operational expenditure might not need to be approved by upper management, whereas a capital expenditure would.

Consider Tax Deductibility

Tax deductions can play a role in your CapEx and OpEx decision-making process. If your business is showing a high taxable income, should you purchase a new company vehicle or approve a roof repair? Timing the CapEx or OpEx cost can help you lower taxable income for a certain accounting period, which can influence purchasing decisions.

Summary

• Capital expenditures are costs that are of a significant nature and provide benefits that exceed one year, while operating expenditures occur in the ordinary course of business and do not have a long-term benefit.
• Examples of capital expenditures include building, vehicle, machinery, equipment, and furniture purchases, while operating expenditures include repairs, maintenance, and supply expenses.
• Investing in the right tracking software, planning for CapEx costs, having defined internal processes, and considering tax deductibility are four core components of effectively tracking capital and operating expenses.