A capital expense is an investment in a business asset that improves its value and is deducted over its expected life. It is listed in annual reports and can range from buying a new building to purchasing a new office printer. The payback period for major assets is set to spread out the deduction over the investment’s life.
A capital expense is an outlay of cash to acquire or upgrade a business asset. Common examples of capital expenditures include the purchase of a new building or the cost of significant improvements to an existing facility. A capital expense is considered deductible because it represents an improvement to the business, and is deducted over the expected life of the item, rather than all at once as in the case of repair or maintenance expenses.
Sometimes a capital expenditure is also known as a capex or capex, and many publicly traded companies list their capital expenditures for the year in annual reports so shareholders can see how the company is using your money on long-term planning. Most companies make capital expenditures on an annual basis, in an attempt to constantly upgrade and improve facilities, vehicles, and equipment.
Sometimes it can be difficult to tell the difference between a capital expense and a routine expense. In general, if the expense improves the value of the asset, it is a capital expense, whereas if it simply keeps the asset in working condition, it is a routine expense. For example, installing a new bathroom in a rental is a capital expense, since it increases the value of the rental. However, repairing the stove is a routine expense designed to keep the rental in working order.
Participating in capital spending is a routine way to improve and expand a business, whether on a small or large scale. Large corporations may acquire additional companies, as in the case of an auto giant buying another automaker, while smaller companies may view the purchase of a new office printer as a capital expense. Generally, allowances are made in the company’s budget for capital expenditures, including unexpected ones that involve replacing items that can no longer be repaired.
A capital expense is amortized over the life of the investment, which can range from an expectation of five to 40 years, depending on the investment. This period of time is known as a payback period, and payback periods for major assets are set so companies know how to deduct capital expenditures. Amortization means that the company cannot deduct the cost of the capital expenditure all at once, and must instead spread it out over the life of the investment. For example, someone who installs a $25,000 US dollar (USD) fence that has a five-year payback period can deduct $5,000 each year for five years.
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