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Capital expenditures (CAPEX or capex) are expenditures altering the future of the business. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life extending beyond the taxable year.
CAPEX are used by a company to acquire or upgrade physical assets such as equipment, property, or industrial buildings. In the case when a capital expenditure constitutes a major financial decision for a company, the expenditure must be formalized at an annual shareholders meeting or a special meeting of the Board of Directors. In accounting, a capital expenditure is added to an asset account, thus increasing the asset's basis (the cost or value of an asset adjusted for tax purposes). CAPEX is commonly found on the cash flow statement under "Investment in Plant, Property, and Equipment" or something similar in the Investing subsection.
For tax purposes, CAPEX is a cost which cannot be deducted in the year in which it is paid or incurred and must be capitalized. The general rule is that if the acquired property's useful life is longer than the taxable year, then the cost must be capitalized. The capital expenditure costs are then amortized or depreciated over the life of the asset in question. Further to the above, CAPEX creates or adds basis to the asset or property, which once adjusted, will determine tax liability in the event of sale or transfer. In the US, Internal Revenue Code §§263 and 263A deal extensively with capitalization requirements and exceptions.
Included in capital expenditures are amounts spent on:
- acquiring fixed, and in some cases, intangible assets
- repairing an existing asset so as to improve its useful life
- upgrading an existing asset if it results in a superior fixture
- preparing an asset to be used in business
- restoring property or adapting it to a new or different use
- starting or acquiring a new business
An ongoing question for the accounting of any company is whether certain expenses should be capitalized or expensed. Costs which are expensed in a particular month simply appear on the financial statement as a cost incurred that month. Costs that are capitalized, however, are amortized or depreciated over multiple years. Capitalized expenditures show up on the balance sheet. Most ordinary business expenses are clearly either expensable or capitalizable, but some expenses could be treated either way, according to the preference of the company. Capitalized interest if applicable is also spread out over the life of the asset.
The counterpart of capital expenditure is operational expenditure (OPEX).
- Operating expense (operational expenditure, OPEX)
- Total cost of ownership (TCO)
- Capital cost
- Cash flow statement
- Income statement
- Balance sheet
- Expenses versus Capital Expenditures, tax terminology in the US.
- Donaldson, Samuel A. Federal Income Taxation Of Individuals: Cases, Problems and Materials (2nd ed.). St. Paul: Thomson West, 2007. pg. 173