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What are 'Capital Goods'

Capital goods are tangible assets such as buildings, machinery, equipment, vehicles and tools that an organization uses to produce goods or services in order to produce consumer goods and goods for other businesses. Manufacturers of automobiles, aircraft, and machinery fall within the capital goods sector because their products are used by companies involved in manufacturing, shipping and providing other services.

BREAKING DOWN 'Capital Goods'

Capital goods that a business does not consume within a single year of production cannot be entirely deducted as business expenses for 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 use of such accounting techniques as depreciation, amortization and depletion.

Capital Goods as Tax Deductions

Depreciation accounts for the annual loss of the tangible asset’s value during the course of its useful life. Amortization aligns an asset’s annual expense with the revenue it generates throughout 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 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 aircraft 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. 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.

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