A:

Current expenses are the necessary purchases that keep your business going from day to day such as rent, utility bills and office supplies. They are short-term purchases, or those used for less than one year, with no long-term effect on the profitability of a business. Current expenses are 100% tax deductible for the year they are incurred. Annual current expenses are deducted from your taxes by subtracting the total expense amount from the annual gross income.

Capital expenses, or CAPEX, are considered asset purchases, or long-term investments made into your business rather than general business expenses. A capital expense could be anything from a real estate purchase to a vehicle, but the general rule is 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 business' profitability. The total cost of the expense is eventually recovered through depreciation.

The Internal Revenue Service 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.

RELATED FAQS
  1. What are the most common operating expenses for an online business?

    Learn about the common expenses of online businesses and find out about some of the tax implications of new business expenses ... Read Answer >>
  2. Difference Between an Operating Expense and Capital Expense

    Learn more about the differences between an operating expense (OPEX) and a capital expense (CAPEX), and see how they are ... Read Answer >>
Related Articles
  1. Taxes

    10 Tax Benefits for the Self-Employed

    Running your own business has both personal and financial perks.
  2. Taxes

    Do Your Research Before Claiming These Deductions

    Be sure to read the fine print about any deduction or credit that you’re planning to claim.
  3. Taxes

    Top Tax Deductions For Brokers

    If you are paying out of pocket, you can make your business expenses work for you at tax time.
  4. Taxes

    Want A Bigger Tax Refund? Don't Itemize

    Six reasons why many taxpayers can save money and time by claiming the standard deduction.
  5. Taxes

    9 Ways the New Tax Law Affects Millennials

    The new tax bill, the Tax Cuts and Jobs Act, includes some important changes for Millennials.
  6. Taxes

    7 Commonly Overlooked Tax Deductions

    Don't pay more taxes than you have to because you've missed taking legitimate tax deductions. Here are just a few you may have overlooked.
  7. Taxes

    Making Sense of the 2017 Tax Changes

    Here is a brief overview of some of the changes introduced by the Tax Cuts and Jobs Act of 2017, and how they may affect your taxes.
  8. Taxes

    Insurance-based Tax Deductions You May Be Missing

    Knowing the tax deductions you're entitled to can make or break your bank account. Do you know about all these insurance-related deductions?
  9. Taxes

    5 Little-Known Tax Deductions And Credits

    Declaring noncash donations and volunteer work expenditures are just some of the lesser-known ways to reduce your taxes.
  10. Taxes

    How To Get The Most Money Back On Your Tax Return

    These tips will help you get a larger refund this year, while teaching you how to pay less taxes going forward.
RELATED TERMS
  1. IRS Publication 535 - Business Expenses

    A document published by the Internal Revenue Service (IRS) that ...
  2. Deductible

    For taxes, a deductible is the expenses subtracted from adjusted ...
  3. Expense

    1. The economic costs that a business incurs through its operations ...
  4. Itemized Deduction

    Taking itemized deductions allows taxpayers who qualify to deduct ...
  5. Form 2106: Employee Business Expenses

    A tax form distributed by the Internal Revenue Service (IRS) ...
  6. Business Interest Expense

    Business interest expense is the cost of interest that is charged ...
Hot Definitions
  1. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  2. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  3. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  4. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  5. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
  6. Sharpe Ratio

    The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Trading Center