What Are Common Examples of Capital Expenditures?

A capital expenditure is a significant, long-term investment a company makes by purchasing major assets that will provide value for more than one year. For example, a new delivery truck for a bakery is a capital expenditure because it is a substantial purchase intended to serve the business for many years. The gasoline to fill its tank, however, is consumed quickly during daily operations.

Understanding this distinction is important because it dictates how the cost is handled in financial records and for tax purposes. These major investments are recorded on a company’s balance sheet, reflecting their long-term contribution to the business’s value.

Differentiating Capital Expenditures from Operating Expenses

To distinguish between capital expenditures (CapEx) and operating expenses (OpEx), it is helpful to understand their different functions. An operating expense is a cost associated with the day-to-day functioning of a business, such as rent, utilities, and salaries. OpEx is consumed within the same accounting period it is purchased and is meant to maintain the current operational state of the business.

The primary distinction lies in their time horizon. A capital expenditure is an investment in an asset that will benefit the company for more than one year, while an operating expense is used up in the short term. This difference in classification has direct financial reporting consequences. Operating expenses are immediately deducted from revenue on the income statement, impacting the company’s reported profitability for that period. Capital expenditures are treated as assets on the balance sheet, and their cost is gradually recognized over their useful life.

Common Examples of Tangible Capital Expenditures

• The acquisition of real estate, including land and buildings, is a capital expenditure. When a company purchases a new office building, a manufacturing facility, or land for future expansion, it is making a long-term investment. The costs associated with these purchases, including the purchase price and fees to make the property ready for use, are capitalized. While buildings can be depreciated, land is not because it is considered to have an indefinite useful life.
• Vehicles used for business purposes, such as company cars, delivery trucks, and specialized equipment like forklifts, are considered capital expenditures. A business acquires these assets to facilitate its operations, whether for transporting goods or enabling employees to travel. Since these vehicles are expected to be in service for more than one year, their cost is recorded as an asset on the balance sheet.
• For many businesses, machinery and equipment purchases are categorized as capital expenditures. This includes heavy machinery on a factory floor and commercial ovens in a restaurant kitchen. These assets are directly involved in producing goods or delivering services and have a useful life beyond a single year. Upgrading machinery or purchasing new equipment to expand capacity are investments in long-term productivity and are capitalized.
• In an office environment, computer hardware and furniture are long-term assets that qualify as capital expenditures. This category includes items like servers, desktop computers, printers, and office desks and chairs. A large-scale purchase of new computer systems for an entire department is a significant investment, as these assets are expected to be used for several years.

Intangible Assets and Major Improvements

Intangible Assets

Capital expenditures are not limited to physical items; they also include non-physical, or intangible, assets. These are assets that lack physical substance but provide long-term value, such as patents, copyrights, trademarks, and software licenses. The costs associated with developing proprietary software or acquiring a patent are capitalized because they are expected to generate economic benefits over multiple years. These intangible assets are recorded on the balance sheet and their cost is spread out over their useful life.

Major Improvements vs. Repairs

A distinction must be made between a major improvement to an existing asset and a simple repair. A major improvement that extends the useful life of an asset, increases its value, or adapts it for a new use is a capital expenditure. In contrast, routine maintenance and repairs that keep an asset in its normal operating condition are treated as operating expenses. For example, replacing the entire roof of a building is a capital improvement, while patching a small leak in that same roof would be a repair and expensed immediately.

Accounting and Tax Treatment

The cost of a capital expenditure is recorded as an asset on the company’s balance sheet. This approach aligns with the matching principle in accounting, which seeks to match expenses with the revenues they help generate over time. The cost is then gradually expensed over its useful life through a process called depreciation, which allocates a portion of the asset’s cost to the income statement each year.

The most common method is straight-line depreciation, where the asset’s cost, minus any salvage value, is divided by its estimated useful life. For example, a machine purchased for $50,000 with a useful life of 5 years would result in a $10,000 depreciation expense each year.

Tax regulations provide specific rules for how businesses can recover the cost of capital assets. The IRS allows for depreciation deductions, and special provisions like Section 179 of the tax code allow businesses to deduct the full purchase price of qualifying equipment in the year it is placed in service. For 2025, the maximum Section 179 deduction is $1,250,000, with a phase-out threshold for total equipment purchases of $3,130,000. Another provision, bonus depreciation, allows for an additional first-year deduction, which is set at 40% for 2025.