CapEx

You may have heard the term “capital expenditure”—or CapEx—and wondered how it differs from other types of business spending. 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. 

What is CapEx?

CapEx is short for capital expenditures, which refers to money that a business allocates to the acquisition or maintenance of long-term assets. “Long-term” is key here as the assets must have a useful life of one year or more in order for the funds used to be considered capital expenditures. Examples of these types of assets include

• Land
• Equipment
• Licenses
• Patents

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.

Frequently asked questions

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.”

Is CapEx tax deductible?

The upfront expenses of capital expenditures are not tax deductible, but the value of depreciation of the assets over the course of a year is. To estimate yearly depreciation, you can divide the amount of your initial investment by the average lifespan (in years) of the asset. For example, if you invest $20,000 in a delivery truck for your business and you expect that truck to last for 10 years, the truck would depreciate at a rate of $2,000 per year.