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What Is a Capital Expense?

Capital expenses are often expensive, long lasting purchases.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 15 July 2014
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Also known as capital expenditures, capital expenses are payments that are used to secure company assets that will be utilized for a period of over one calendar year. One of the most common examples of a capital expense is the purchase of a building, or equipment that is used in the production process for a number of years. In addition to property and machinery, other types of purchases may also qualify as a capital expense, assuming the cost is spread over an extended period of use.

While many businesses employ a core of similar capital expenditures, there are examples of capital expense that are associated with specific industry types. For example, a bookstore that purchases new shelves to display the items carried in the shop would be considered a capital expense, since the shelves are key to the function of the business, and are likely to last for many years. A taxi is considered a capital expense for a cab company, since the asset is essential to the operation of the business, and is anticipated to be in continual operation for more than a single twelve-month period.

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An important difference between a capital expense and other types of expenses is the durability of the item that is purchased. Lighting fixtures purchased for buildings owned by a company would be considered a capital expense, since the fixtures are expected to provide service for longer than one year. At the same time, an expense such as the monthly gas or electricity bill would be considered an operating expense instead of a capital expense. This is because the utilities are already consumed within the last month, and cannot provide any more benefit to the business.

In many nations, there are tax incentives offered in order to encourage businesses to purchase assets that have a long life. A business may choose to purchase property as part of its overall operating strategy, and be able to enjoy tax breaks associated with the mortgage that was used to secure the property. As long as the company is paying on the mortgage, those tax breaks continue, although they may lessen each succeeding year. There are also situations in which the business can earn a tax deduction on a particular capital expense, if that expense was due to the need to replace equipment considered necessary to the efficiency and productivity of the business operation. Professional accountants can help the business owner identify any applicable deductions that relate to any of the capital expenditures, and make sure the deduction is claimed in accordance with the guidelines set by the appropriate tax agency.

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