Building Your Business

Operating vs. Capital Expenses: What's the Difference?

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Updated on July 27, 2022

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Managing expenses, a key part of running a business, can be divided into two main categories: operating expenses and capital expenses.

Operating expenses are usually ongoing costs incurred for daily operations that keep the business running like employee pay and marketing costs. Capital expenses, on the other hand, are typically one-time costs of purchasing fixed assets and making long-term investments like buying a building, upgrading technology, or purchasing patents, to name a few examples.

Let’s explore the key differences between operating expenses and capital expenses so you can learn how they play a role in your business planning. As you’ll see, determining which expenses are operating expenses and which are capital expenses is not always clear cut.

Key Takeaways

Business expenses can be divided into two main categories: operating expenses and capital expenses.
Capital expenses include long-term investments like buying a building, investing in machinery, or filing patents.
Operating expenses include daily expenses like the cost of rent, office supplies, and staff wages that are part of running ongoing operations.

What Are Capital Expenses?

A capital expenditure (CapEx) occurs when a company spends money, utilizes collateral, or incurs debt to purchase a new asset or enhance value to an existing one. These are often one-time expenses.

Examples of CapEx include:

Purchasing office space or machinery
Major upgrades to existing facilities
Filing patents
Buying company vehicles

What Are Operating Expenses?

An operating expenditure (OpEx) is a daily cost required to keep the business operational. Typically, these are recurring, short-term expenses.

Examples of operating expenses include:

Employee wages
Rent
Insurance
Supplies
Legal fees
Minor repairs
Taxes
Travel
Utilities
Marketing costs

CapEx vs. OpEx: Key Differences

Capital expenses and operating expenses have significant differences in terms of how they are applied to taxes and how they are accounted for in a budget. Companies also may have different processes for how each type of expense is approved.

Here are some of the key differences between capital expense and operating expenses.

	Capital Expense	Operating Expense
Taxes	Generally not deductible in full in one year, but can be depreciated over several years	Usually fully deductible in the year of the expense
Budgeting	Requires upfront one-time payment	Ongoing expense
Approval process	Often has a more complicated approval process requiring high-level approval	Often has a straight-forward, pre-approved process in place

Taxes

You generally cannot deduct capital expenses in the year you incur them because you’ll capitalize them. Whenever a business incurs capital expenses, it also typically adds an asset, so the IRS views capital expenditures as an investment in the business. However, you can deduct part of the cost of your capital expenses each year through depreciation, amortization, or depletion to eventually recover the expense.

On the other hand, operating expenses can be deducted from the company’s taxes the same year they were incurred.

Budgeting

Most capital expenses require an upfront payment and are considered long-term investments. This means you may have to budget for CapEx well in advance or consider taking a loan.

Note

Conversely, operating expenses are ongoing and businesses may pay these bills, for example, monthly or quarterly. These costs also require some degree of budgeting as these are recurring expenses.

However, since operating expenses are typically less expensive and short term, operating expenses may not require as much advanced planning as capital expenses, and you generally won’t need loans for them.

Approval Process

Since capital expenditures are a relatively expensive cost toward a long-term investment, they typically require higher-level approvals. The approval process can take time and delay the purchases.

On the other hand, regular operating expenses are typically pre-approved in a budget, so they don't require repeated approvals. Once approved, the bills for operating expenses are paid regularly, sometimes through an automated process.

Note

Beyond capital and operating expenses, business expenses can be divided into several other categories like deductible and non-deductible expenses, direct and indirect costs, overhead costs, and more.

How Both Expenses Matter to Your Business

A business's success depends on managing and monitoring both capital expenses and operating expenses.

Knowing how much your business is spending and the rate of return you’re getting on that investment gives insight into how you can invest better, save more, multiply profits and find more growth opportunities.

“Companies can use CapEx to maintain their plant, property, and equipment and identify methods to improve them, whether by enhancing them or purchasing new ones,” Lyle Solomon, an attorney with Oak View Law Group in Auburn, Calif., told The Balance in an email. “OpEx can be used to find cost-cutting measures and identify opportunities for increased efficiency.”

How Do You Calculate Total Operating Expenses?

Total operating expenses can be calculated by adding up all the recurring costs. The specific operating expenses will vary by business, but common ones include: office supplies, insurance, licensing fees, legal fees, marketing and advertising, payroll and wages, taxes, utilities, and vehicle expenses.

What Is the Difference Between the Cost of Goods Sold and Operating Expenses?

The cost of goods sold is a business expense determined by subtracting the value of inventory at the end of a tax year from the value at the beginning plus any expenses incurred related to production like labor and raw materials. Operating expenses are expenses incurred for the running of the business, which can include expenses like marketing that the cost of goods does not include.

The Bottom Line

Capital expenses are long-term investments you make to improve your company while operating expenses are costs you incur to keep your business operational.

CapEx includes major expenses like patents and buying office space while OpEx includes recurring expenses like staff salaries and machine upkeep. Both these types of expenses are important to keep a business functional and growing.

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Sources

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

The U.S. Small Business Administration. “Office of Entrepreneurship Education.”
Internal Revenue Service. “Topic No. 704 Depreciation.”
Internal Revenue Service. “Publication 535 (2020), Business Expenses | Internal Revenue Service.”
Tufts University. “Capital Expenditure Authorization (CEA) Process.”