capital expenditure
Spending on physical assets that will be used for more than one year, such as equipment, buildings, and vehicles, capitalized on the balance sheet and depreciated over time.
Example
“The manufacturer's $50 million in capital expenditures this year would be depreciated over 10 years rather than expensed immediately.”
Memory Tip
CAPEX = spending on long-lived assets. Goes on balance sheet, not directly to income statement.
Why It Matters
Capital expenditures directly affect how much tax you can deduct and when you can deduct it, which impacts your overall tax bill and cash flow. Understanding the difference between capital expenditures and regular expenses helps you make better decisions about whether to buy, lease, or maintain assets for your business or investments.
Common Misconception
Many people think that all business spending counts as an immediate tax deduction in the year it occurs. In reality, capital expenditures must be spread over several years through depreciation rather than deducted all at once, which delays the tax benefit you receive.
In Practice
If a small business buys a delivery truck for 30000 dollars, they cannot deduct the full amount in year one. Instead, they depreciate it over five years, deducting 6000 dollars per year in depreciation expense, which reduces their taxable income gradually and more accurately matches the truck use to the years it generates revenue.
Etymology
CAPITAL (long-term investment) EXPENDITURE (spending). Spending on long-term CAPITAL assets.
Common Misspellings
Small business accounting made simple
Related Terms
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See Also
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