Understanding CapEx vs. OpEx

As an HR Party of One at a small business, you may be responsible for managing your organization’s finances, at least until you hire a finance or accounting professional.

Either way, understanding the ways money is being spent is vital to your organization’s long-term business and financial success. Keep reading to learn the key differences between Capital Expenditures (CapEx) and Operational Expenditures (OpEx).

What Is CapEx?

Capital expenditures (CapEx) are large expenditures that an organization expects to influence long-term profitability, production, and efficiency. They usually refer to the money spent by a company on one-time costs or fixed assets like:

Property
Software Infrastructure
Computer Hardware
Licenses
Buildings
Vehicles
Equipment
Land

The IRS defines CapEx as: “the costs of acquisition, construction, or erection of buildings, machinery and equipment, furniture, and fixtures, and similar property having a useful life substantially beyond the taxable year.”

What Is OpEx?

OpEx, on the other hand, are your organization’s current day-to-day expenses that are incurred and utilized within the same year. OpEx are the costs that come with running your business. Examples include:

Employee wages and salaries
Rent
Office supplies
Advertising or marketing expenses
Insurance
Travel costs
Repair and maintenance costs
Utility costs
Accounting and legal fees

How Do Tax Deductions Work for CapEx and OpEx?

Per Internal Revenue Code §263, tax deductions are not permitted for Capital Expenditures, but they can still help reduce taxable income over time through depreciation or amortization.

However, the IRS allows for-profit businesses to deduct Operational Expenditures for the year in which they were incurred, if the expenses are “ordinary and necessary”. The OpEx costs listed in the previous section are considered tax-deductible. Examples of business expenses that would not be tax-deductible are:

Dues for clubs
Commuting costs
Business gifts
Entertainment expenses

Tracking and reporting your expenses can save your organization thousands of dollars in taxes, and it can show you where you may be able to cut back on spending. The challenge is to limit expenses as much as possible without losing status as a competitor in your industry. Consider using detailed expense sheets or business expense tracker apps to manage your receipts and make strategic financial decisions.

Additional Resources

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