What Is a Capital Expenditure?

Written by jack s. waverly
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"Capital expenditure" is an accounting term used to describe certain purchases or spending by a business. While a business might define many purchases as capital expenditures, the Internal Revenue Service has strict definitions of the term for tax purposes. The definition used depends on the type of expenditure and what the purchased item is used for.

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Definition

Capital expenditures are purchases that are deducted from expenses in the years after the item is purchased. A capital expenditure usually creates a realised benefit over a time frame greater than a year. Items that last for many years are considered capital expenditures.

Uses

A capital expenditure can be used to spread out the cost of purchasing machinery, buildings or physical property or the cost of research and development for products or systems. Capital expenditures are also used by investment firms as a measurement of a company's investment in its future generation of revenue.

Purchases made when starting a business or legal costs are capital expenditures. Refurbishing of assets can be considered capital expenditures. Fixing problems that are associated with an asset can be considered capital expenditures.

Types

There are two types of capital expenditures: growth and maintenance. Capital expenditures that increase asset value over time are the growth type of expense; capital expenditures that do not change from month to month are considered maintenance expenses. An example of a growth expense is an addition to a building or purchase of another business to add to the current business. Maintenance expenses include ongoing upgrades to a facility--stores, schools and apartment complexes, for example--or ongoing replacement costs.

Taxes

According to the IRS tax code, capital expenditures are used to determine the value of the asset or property. This value will determine the tax liability should the asset or property be sold or transferred once the value is adjusted. Using a capital expenditure for an asset allows a company to deduct a portion of the expense over multiple years while the asset depreciates.

Determination

Assets and expenditures that are not considered capital expenditures include inventory, personnel and training. Capital expenditures do not cover daily operation costs of a business.

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