What are Capital Goods?
Capital goods are tangible assets that one business produces that is in turn used by a second business to produce consumer goods or services. Capital goods include tangible assets, such as buildings, machinery, equipment, vehicles, and tools that an organization uses to produce goods or services.
Understanding Capital Goods
Capital goods are tangible assets that an organization uses to produce goods or services such as office buildings, equipment, and machinery. Consumer goods are the end result of this production process. Manufacturers of automobiles, aircraft, and machinery fall within the capital goods sector because their products are subsequently used by companies involved in manufacturing, shipping, and providing other services.
Capital goods that a business does not consume within a single year of production cannot be entirely deducted as business expenses in the year of their purchase. Instead, they must be depreciated over the course of their useful lives, with the business taking partial tax deductions spread over the years that the capital goods are in use. This is done through accounting techniques such as depreciation and depletion.
Depreciation accounts for the annual loss of the tangible asset’s value during the course of its useful life. Depletion is an accounting technique utilized for spreading out the cost of natural resources as they are used by a business. Depletion can be calculated by using either cost depletion or percentage depletion.
For example, when deducting the cost of standing timber, taxpayers must use the cost depletion technique, based on the total number of recoverable units and the number of units sold during the tax year. Percentage depletion assesses the cost of the materials as a percentage of the company’s gross income during a given year.
Types of Capital Goods
Capital goods are not necessarily fixed assets, such as machinery and manufacturing equipment. The industrial electronics industry produces a wide variety of devices which are capital goods. These range from small wire harness assemblies to air purifying respirators and high-resolution digital imaging systems. Capital goods are also produced for service businesses. Hair clippers used by hair stylists, paint used by painters, and musical instruments played by musicians are among the many types of capital goods purchased by service providers.
Core capital goods are a class of capital goods which excludes aircrafts and goods produced for the Defense Department, such as automatic rifles and military uniforms. The Census Bureau’s monthly Advance Report on Durable Goods Orders includes data on purchases of core capital goods, also known as Core CAPEX, for capital expenditure. This information is closely followed as a forward-looking indicator on the degree to which businesses plan to expand. Durable goods are products with an expected useful life of at least three years.