CapEx vs. OpEx - The Case for the Cloud
Hi there, Carla Virola of InVision Source coming to you today on a very timely topic CapEx versus OpEx as it relates to Technology and the "Cloud". I will say that I am referencing an article that was on the web from: Diffen.com
Now here's a snapshot of the key differentiators of CapEx and OpEx. Essentially it comes down to the way CapEx expenditures are accounted for in an income statement. Since capital expenses acquire assets that are used beyond the tax year, these expenses cannot be fully deducted in the year in which they are incurred. Instead, they are "capitalized" and either amortized or depreciated over the life of the asset.
Intangible assets like intellectual property (e.g. patents) are amortized and tangible assets like equipment are depreciated over their lifespan.
Now let's come to Operating expenditure, on the other hand, Operating expenditure can be fully deducted. "Deducted" means subtracted from the revenue when calculating the profit and loss of your business. Most companies are taxed on the profit that they make; so what expenses you deduct impacts your tax bill at the end of the year.
What is preferred: CapEx or OpEx?
From an income tax perspective, businesses typically prefer OpEx to CapEx. For example, rather than buy laptops and computers outright for $800 apiece, a business may prefer to lease it from a vendor for $300 apiece for 3 years. This is because buying equipment is a capital expense. So even though the company pays $800 upfront for the equipment, it can only deduct about $250 as an expense in that year.
On the other hand, the entire amount of $300 paid to the vendor for leasing is now operating expense because it was incurred as a part of the day-to-day business operations. So, the company can then take rightfully so, deduct that as cash spent in that tax year.
The advantage of being able to deduct expenses is that it reduces income tax, which is levied on net income. This is all very tax related but another advantage is the time value of money i.e. if your cost of capital is 5% then saving $100 in taxes this year is better than saving $104 in taxes next year.
So how does this all affect your potential investment in technology for your company, i.e. a move to the "Cloud"? Now that decision is very individual and most companies are considering moving their technology expenditures from that CapEx column to the OpEx column on the balance sheet and for good reason - technology moves at the speed of light.
So considering a move or "hybrid" connection to the cloud for your company should be carefully thought out. Why don't you reach out to us here at InVision Source so we can help you sort it all out and open the discussion on how you can best approach your move from CapEx to OpEx or architect a hybrid environment that makes sense for you. You can reach us here at www.invisionsource.com.