How to Define Capital Expenditure

Capital Expenditure is defined as the money a company pays to buy, improve or maintain an asset needed for business. It must be for physical objects like equipment, infrastructure or buildings.

Difficulty:

Easy

Instructions

1. Examine what you spend on things you need to run your business. If you are spending money to buy a piece of equipment or service an existing piece of equipment it is a capital expenditure.

2. Understand what is not a capital expenditure. Routine expenses like inventory, personnel, and training are not capital expenditures. Only physical objects needed to operate your business or money spent to upgrade them are considered capital expenditures.

3. Realize that a capital expenditure needs to be treated differently on tax returns, defending on how it is used. If it is the new purchase of a building or equipment then the cost of the expenditure can be spread over many years while the asset is being used. If the expense maintains the asset in its current condition then the cost is deducted completely in that tax year.

4. Search for the capital expenditures of publicly traded companies in the annual reports. Many investors want to know how companies are investing in future business. It is also called "capital spending" or a "capital expense" in these reports.

5. Be aware of the tax ramifications of a capital expenditure. Companies use amortization to spread deductions of capital expenditures over the useful life of the equipment. This recovery period allows businesses to claim a deduction for the capital expenditure over several years while the asset depreciates.

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