The difference between capital expenditure and revenue expenditure
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Updated 29 July 2020
Overview
This article aims to advice self-employed professionals on the differences between capital and revenue expenditure. We will also be covering some of the general need to know facts about reporting the two types of expenditure, depreciation and much more.
If, after reading this article, you have further questions or require tax and accounting support, contact us. We are a team of chartered accountants, specialising in US and UK taxation worldwide.
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The main difference between capital expenditure (CAPEX) and revenue expenditure is whether the business-related purchase will be the life of the asset. A revenue expense is generally incurred due to the day to day running of your business, while a capital expense is recognized more as an investment in an asset that will be used over a number of years.
Claiming capital and revenue expenses on your federal tax return can minimise your tax owed for the given tax years. There are a number of tax breaks available dependent on the expense. This is why it can be recommended to seek tax advice from specialist tax advisers to ensure you’re receiving the maximum tax reliefs available.
What is a capital expense?
Capital Expenditure is classed as major investments a company makes to maintain or expand its business. A practical example of this may be if a hospital invests in an MRI scanner that will be used to diagnose patients over a number of years. The asset will generate income for the business over a period of years, therefore the business cannot deduct the full cost of the asset in one year. They must recover the cost over the number of years the asset is providing income to the business.
What if a capital asset breaks before you claim back the full value on your tax return?
If a capital asset breaks before you have claimed the full amount. you claim back the full amount in the tax year the asset ceased to use. If you receive an insurance payout to replace the item, you should then revalue the expenditure at the new value of the replacement.
Capital Assets and depreciation
Most assets will decrease in value over time, thus decreasing the value of the business. This decrease in value is known as depreciation. Although depreciation is an expense for the business, it is not considered a cash expense, since it does not have to be paid with cash.
The Tax Cut Jobs Act (2017)
The IRS has introduced a higher bonus depreciation incentive that allows businesses to immediately deduct a large percentage of the purchase price of eligible assets, rather than claim them over the"Useful life" of the asset. Businesses should use the IRS Form 4562 to record bonus depreciation as well as other types of depreciation and amortization.
To find out more about capital assets and depreciation go to this article.
Examples of a capital expense
Computers
Tools
Property
Software
To find out ways companies can budget for capital expenses read this article.
What is a revenue expense?
Unlike capital expenses, revenue expenses can be deducted in full during the tax year the expense was incurred. Revenue expenses are shorter-term expenses that can be broken down into two major categories:
Expenditure for generating revenue
Any expenses required to meet the ongoing operational costs of running your business.
Stationary
Ad placements
Travel
Expenditure for maintenance of revenue-generating assets
Ordinary repair and maintenance costs that are necessary to keep the asset in working order without substantially improving or extending the life of the asset.
-Insurance
-Small fixes on equipment. I.e. an MOT on a business car
Are repair and renewal costs a capital or revenue expense?
As mentioned above 'ordinary' repairs and maintenance costs are regarded as a revenue expense. However, if the item is drastically improved as a result of the repair or renewal the repair will be regarded as a capital expense. For example, leading on for the example of an MOT on a business car, if the entire engine of the car was to be replaced with a more powerful engine it would be regarded as a capital expense.
Capital Expenditure and Revenue Advice
If you are requiring support on filing your state or federal tax returns, contact our team of CPA's. We are specialist in all areas of UK and US taxation worldwide.