Business

CapEx vs OpEx?

Looking from an income tax perspective, businesses usually prefer OpEx to CapEx.

For example, rather than buying laptops and computers outright for $550 to $1000 a piece, or a server for $20,000, a business may prefer to lease those items from a vendor for around $300 each for 3 years. Buying business equipment is a capital expense. So even though the company pays $800 upfront for the equipment, it can only depreciate around $250 as an expense in that year.

However with leasing, the entire amount of $300 paid to the vendor for leasing is operating expense because it is part of normal business operation. The company can expense and deduct the cash it spent that year.

The advantage of being able to write off expenses is that it reduces income tax, which is figured on net income. One other advantage is the value of money over time, if your cost of capital is 7% then saving $100 in taxes this year is better than saving $107 in taxes next year.

But tax savings may not be a business's only need. If a traded company wants to up its profit and book value, it may opt to make a capital expense and only deduct a portion of it as an expense. The result is a higher asset on the balance sheet,  and a higher net profit that it can show investors.


Let's explore how cloud computing compares to acquiring a business vehicle.

Ever considered leasing an automobile instead of buying one?
To compare buying a car versus leasing a car is to compare the differences between capital expenditures and operational expenditures. When you buy a car outright, you’re using existing capital to pay for it. You’re not completely sure how long you’ll own it, but you know that you’ll likely need a mechanic for basic maintenance like oil changes....

You also know that you’ll have to eventually buy parts and pay your mechanic to install them. Those costs will likely escalate the longer you own your vehicle. The benefits, of course, are that you know exactly when your last monthly payment will be and that you’ll have some remaining value in the car should you choose to trade it in. When you lease a car, you don’t have to possess any more capital than the down payment.

With leasing, you also get the benefit of lower monthly payments, reduced maintenance cost, and perhaps the chance to drive something a little nicer. Best of all, you know what your expenses are going to be every month, in part, because you’re always driving new vehicles that are covered under the manufacturer’s warranty.

You also understand that you are forgoing any trade-in value at the end of the lease term. Automobile leasing isn’t for everyone, but if you were starting a delivery business it could be exactly the right financing model for your fleet.
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