Capital expenditure: what it is, how to calculate it, and examples

Published Thursday 23 July 2026

Table of contents

• What is capital expenditure?
• Why capital expenditure matters for your business
• How to calculate capital expenditure
• Accounting and tax treatment of capital expenditure
• How to budget for capital expenditure
• Track capital expenditure with Xero
• FAQs on capital expenditure

Key takeaways

• Capital expenditure (capex) is money you spend on long-term assets like equipment, vehicles, or property. You record these purchases as assets on your balance sheet and spread the cost over the asset's useful life through depreciation.
• Tracking capex helps you understand how your business invests for growth versus maintaining current operations. Separating maintenance capex from growth capex gives you a clearer picture of where your money goes.
• You can calculate capex by adding the change in property, plant and equipment (PP&E) to current period depreciation. This formula shows how much cash your business actually spent on new or upgraded assets.
• Consult an accountant for asset purchases over $10,000 or when you're unsure about capex classification. Proper tax treatment, including Section 179 expensing and bonus depreciation, can help reduce your tax bill.

What is capital expenditure?

Capital expenditure (capex) is money you spend to buy, upgrade, or extend the life of long-term business assets like land, equipment, or buildings. Unlike everyday business costs, these purchases benefit your business for more than 1 year.

You record capital expenditures as assets on your balance sheet rather than listing them as expenses. Over time, you spread the cost through depreciation, which reduces the asset's value gradually across its useful life.

Capex vs opex: what's the difference?

The difference between capital expenditure (capex) and operating expenditure (opex) comes down to how long the purchase benefits your business. Learn more about the difference between capex and opex.

Capital expenditures (capex) cover assets that generate revenue for multiple years. These include items like equipment, buildings, vehicles, and software licenses. You record them as assets on your balance sheet.

Operating expenditures (opex) cover your day-to-day business costs. These include payroll, utilities, insurance, marketing, and office supplies. You record them as expenses that reduce your current year profits.

Examples of capital expenditure

Capital expenditures fall into several categories depending on the type of asset you're acquiring. Here are some common examples.

Physical assets include:

• Property: land, buildings, and warehouses
• Equipment: manufacturing machinery, computers, and vehicles
• Infrastructure: office furniture, security systems, and HVAC upgrades

Intangible assets include:

• Intellectual property: patents, copyrights, and trademarks
• Software: business management systems and specialized tools
• Business acquisitions: purchasing another company or its assets

Growth investments include:

• Research and development: product development costs
• Expansion projects: new locations and production lines

According to the NFIB Small Business Economic Trends survey (May 2026), 37% of small business owners who made capital outlays spent on new equipment, 25% acquired vehicles, and 13% improved or expanded facilities.

Maintenance capex vs growth capex

Capital expenditures fall into 2 categories based on their business purpose. Understanding the difference helps you evaluate how you're investing your money.

Maintenance capex covers spending to replace or repair existing assets so your current operations keep running. For example, replacing a broken warehouse forklift is maintenance capex. This type of spending keeps your revenue and profitability at current levels.

Growth capex covers spending to acquire new assets that expand your business capacity or reach. For example, buying additional forklifts for a new, larger warehouse is growth capex. This type of spending increases your revenue potential and opens up new market opportunities.

The NFIB Small Business Economic Trends survey (May 2026) found that 55% of small business owners made capital outlays in the previous 6 months, showing how common capex spending is across small businesses.

Why capital expenditure matters for your business

Capital expenditure directly shapes how your business grows and competes over time. Understanding where your capex goes helps you make smarter decisions about your long-term investments.

Capex drives business growth by funding the assets you need to serve more customers, enter new markets, or improve productivity. A bakery that buys a second oven can fill more orders. A consulting firm that invests in project management software can take on more clients without adding staff.

Capex also affects your cash flow. Large asset purchases reduce the cash you have available for day-to-day operations. Planning ahead helps you avoid cash shortfalls that could disrupt your business.

For small businesses, tracking capex separately from regular expenses gives you a clearer view of your financial health. It shows whether you're investing enough to sustain and grow your operations, or spending mainly to keep things running as they are.

How to calculate capital expenditure

Calculating capital expenditure helps you track how much your business invests in long-term assets and plan future purchases.

The basic capital expenditure (capex) formula is:

Capex = change in property, plant and equipment (PP&E) + current period depreciation

Follow these steps to calculate capital expenditure:

1. Find the PP&E change by subtracting last year's PP&E from this year's PP&E on your balance sheet.
2. Add the depreciation expense from your income statement for the same period.
3. Add the 2 figures together. The result shows the actual cash your business spent on new assets.

Here's a quick example. If your PP&E increased by $50,000 this year and your depreciation expense totaled $15,000, your total capex would be $50,000 + $15,000 = $65,000.

You can also track capital expenditure with a simpler approach:

• Record all asset purchases above your capitalization threshold (for example, $1,000)
• Categorize each purchase as maintenance or growth
• Compare your quarterly or annual capex to your budget and revenue

Accounting and tax treatment of capital expenditure

You treat capital expenditures as assets rather than immediate expenses. This affects your taxes and financial statements differently from regular business costs.

How capex appears in your accounts

When you make a capital expenditure, the purchase shows up in several places across your financial statements.

• Balance sheet: you record capex as assets that appear under property, plant and equipment
• Depreciation: you spread the cost over the asset's useful life, typically 3 to 10 years
• Cash flow statement: capex shows as an investing activity, not an operating expense

Tax treatment of capital expenditure

Capital expenditures come with specific tax rules that can work in your favor when applied correctly.

• You can't deduct the full cost of a capital expenditure in the year you buy it
• You claim annual depreciation as a tax deduction over the asset's useful life
• Section 179 lets you deduct the full cost of qualifying assets immediately, up to annual limits. For tax year 2025, the maximum Section 179 deduction is $2,500,000. This limit is reduced if you place more than $4,000,000 of property in service during the year.
• Bonus depreciation lets you claim accelerated deductions on certain qualified property. For qualified property acquired and placed in service after January 19, 2025, you may claim a special depreciation allowance of 100% under the One, Big, Beautiful Bill Act.

When to consult an accountant

Some capex decisions benefit from professional guidance. Consider talking to an accountant in these situations:

• You're making asset purchases over $10,000
• You're unsure whether a purchase counts as capex or opex
• You need to set up complex depreciation schedules
• You're planning large investments and want to minimize your tax liability

How to budget for capital expenditure

A capital expenditure budget, similar to your small business budget, helps you plan major purchases without putting your cash flow at risk. Building one doesn't have to be complicated.

Set a capitalization threshold

Your capitalization threshold is the minimum cost for a purchase to count as a capital expenditure rather than a regular expense. Most small businesses set this threshold between $500 and $2,500, though the right number depends on your business size and industry.

Discuss your threshold with an accountant to make sure it aligns with tax rules.

Evaluate the return on investment

Before committing to a large purchase, estimate the value it'll bring back to your business. Ask yourself how the asset will increase revenue, reduce costs, or improve efficiency.

For example, if a $20,000 piece of equipment saves you $8,000 per year in labor costs, it pays for itself in about 2.5 years. Compare that payback period against the asset's useful life to see whether the investment makes sense.

Plan capex alongside cash flow

Timing matters when you're making big purchases. Review your cash flow forecast before committing to a capital expenditure, so you know you can cover the cost without straining day-to-day operations.

If the purchase is too large to fund from cash reserves, explore financing options. Leasing, loans, and lines of credit can spread the cost over time, which keeps more cash available for running your business.

Track capital expenditure with Xero

Tracking your assets and their depreciation doesn't have to be complicated. With the right tools, you can stay on top of capital expenditures and see your business's financial health clearly.

Xero's fixed asset management lets you record new assets, automate depreciation calculations, and help keep your books accurate. You can categorize each asset, set depreciation schedules, and pull reports that show exactly where your investment stands.

Spend less time on the books and more time growing your business. Get one month free.

FAQs on capital expenditure

Here are some frequently asked questions about capital expenditure.

Is a capital expenditure an asset or an expense?

You record a capital expenditure as an asset on your balance sheet. Over time, you expense it through depreciation, which is different from an operating expense that you deduct in the period it occurs.

What's the minimum cost for an item to be a capital expenditure?

There's no single dollar amount that applies to every business. Each company sets its own capitalization policy, which defines the cost threshold for treating an item as capex, so work with an accountant to set yours.

Can software be a capital expenditure?

Yes, if you buy software with a 1-time payment and it has a useful life of more than a year, you usually treat it as capex. Monthly or annual subscription payments are typically classified as operating expenses.

How does capital expenditure affect cash flow?

Capital expenditure reduces your available cash in the period you make the purchase. However, because you depreciate the asset over its useful life, the expense only affects your profit and loss statement gradually over multiple years.

Why is capital expenditure important for small businesses?

Capex investments fund the assets your business needs to grow, stay competitive, and operate efficiently. Tracking capex helps you understand whether you're investing enough in long-term growth or mainly spending to maintain current operations.

What is a capital expenditure budget?

A capital expenditure budget is a plan that outlines the major assets you intend to buy or upgrade over a specific period. It helps you allocate funds, avoid cash flow surprises, and prioritize investments that deliver the best return.