Capital Expenditure

Capital expenditure 1 Capital expenditures (CAPEX or capex) are expenditures creating future benefits. 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.

Capital expenditure Usage 1 In accounting, a capital expenditure is added to an asset account ("capitalized"), thus increasing the asset's basis (the cost or value of an asset adjusted for tax purposes)

Capital expenditure Accounting rules 1 The capital expenditure costs are then amortized or depreciated over the life of the asset in question

Capital expenditure Accounting rules 1 Included in capital expenditures are amounts spent on:

Capital expenditure Accounting rules 1 The counterpart of capital expenditure is operational expenditure ("OpEx").

Free cash flow - Problems with capital expenditures 1 A second problem with the maintenance capex measurement is its intrinsic 'lumpiness'. By their nature, expenditures for capital assets that will last decades may be infrequent, but costly when they occur. 'Free cash flow', in turn, will be very different from year to year. No particular year will be a 'norm' that can be expected to be repeated. For companies that have stable capital expenditures, free cash flow will (over the long term) be roughly equal to earnings

Capital expenditures 1 'Capital expenditures' (CAPEX or capex) are Expense|expenditures creating future benefits. 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.

Capital expenditures - Usage 1 In accounting, a capital expenditure is added to an asset account (capitalized), thus increasing the asset's basis (the cost or value of an asset adjusted for tax purposes)

Capital expenditures - Accounting rules 1 The capital expenditure costs are then amortization (business)#Accounting|amortized or depreciation|depreciated over the life of the asset in question

Expenses versus Capital Expenditures 1 Capital expenditures either create cost basis or add to a preexisting cost basis and cannot be deducted in the year the taxpayer pays or incurs the expenditure.Id

Expenses versus Capital Expenditures 1 In terms of its accounting treatment, an expense is recorded immediately and impacts directly the income statement of the company, reducing its net profit. In contrast, a capital expenditure is capitalized, recorded as an asset and depreciated over time.

Expenses versus Capital Expenditures - Four ways costs can be capital expenditures 1 The Internal Revenue Code, Treasury regulations|Treasury Regulations (including new regulations proposed in 2006), and case law set forth a series of guidelines that help to distinguish expenses from capital expenditures, although in reality distinguishing between these two types of costs can be extremely difficult

Expenses versus Capital Expenditures - Four ways costs can be capital expenditures 1 The Court held that because the equipment was used to invest in a capital asset – the new and improved facilities – the costs had to be treated as capital expenditures.This result was codified in IRC § 263A, the uniform capitalization (or UNICAP) rules.

Expenses versus Capital Expenditures - Four ways costs can be capital expenditures 1 Because the taxpayer knew in advance the property had an inadequate drainage system, the costs to accomplish this adaptation of the property were a capital expenditure

Expenses versus Capital Expenditures - Four ways costs can be capital expenditures 1 Though it is an oversimplification, when trying to distinguish between expenses and capital expenditures it can be helpful to remember that the U.S. tax code attempts to levy tax on those most able to pay it.

Expenses versus Capital Expenditures - Illustrative Example 1 Thus the truck is a capital expenditure which should be depreciated

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