Current expenses are the necessary purchases that keep your business going from day-to-day such as rent, utility bills and office supplies. Meanwhile, capital expenditures, or CAPEX, are considered asset purchases, or long-term investments made into your business rather than general business expenses.
What Are Capital Expenditures (CAPEX)?
For an item to be considered as a CAPEX, it could be anything from a real estate purchase to a vehicle, but the general rule is that CAPEX must last a year or more. Because CAPEX is treated as an investment, it is deducted from your taxes differently than current expenses. Beginning in the year following the purchase, expenses are deducted over the course of several years, or capitalized, to better reflect the profitability of the business. The total cost of the expense is eventually recovered through depreciation.
The Internal Revenue Service (IRS) has strict guidelines for how CAPEX is written off and what qualifies as this type of expense. For example, repairs are considered current expenses but improvements are capital expenses. If you had a leaky roof fixed at your furniture store, you could deduct the cost of repairs from the current year's taxes as a repair, but if you completely replaced the roof, this expense is considered an improvement that must be deducted over several years.
What Are Current Expenses?
Current expenses are short-term purchases, or those used for less than one year, with no long-term effect on the profitability of a business. They are fully tax deductible for the year in which they are incurred.
Annual current expenses are deducted from your taxes by subtracting the total expense amount from the annual gross income.