What is a capital expense?

A capital expense is any ordinary and necessary business cost used to acquire, upgrade, or maintain a long-term asset that will benefit the business for more than one accounting period. Instead of being deducted all at once, capital expenses are typically capitalized and expensed gradually over time through depreciation or amortization. Capital expenses are essential for building infrastructure, increasing capacity, and supporting long-term business strategy.

How to categorize capital expenses

Record the cost as an Asset on the balance sheet rather than an operating expense.
Classify assets appropriately (for example, Equipment, Vehicles, Furniture, or Intangible Assets).
Depreciate or amortize the asset over its useful life according to accounting and tax rules.
Expense repairs and maintenance that do not extend asset life as operating expenses.
Maintain invoices, purchase agreements, and depreciation schedules for documentation.

Examples of capital expenses

Purchase of machinery, equipment, or tools.
Vehicles used for business operations.
Computers, servers, and major technology hardware.
Office furniture and fixtures.
Building purchases or major property improvements.
Software development costs or purchased long-term software licenses.
Patents, trademarks, or other intangible assets.

Tax implications for capital expenses

Capital expenses are not fully deductible in the year of purchase under standard rules.
Businesses typically recover costs through depreciation or amortization over time.
Certain assets may qualify for accelerated deductions, such as Section 179 or bonus depreciation.
Personal use of capital assets must be prorated to determine deductible amounts.
Capital expenses are reported on business tax returns in accordance with the chosen depreciation method.