OpEx vs CapEx: What should SMBs choose? There’s a lot of talk in the IT world today about OpEx vs CapEx. Now more than ever, SMBs have options for treating IT hardware and software as either an operating expense or a capital expenditure. They wonder which one is better among CapEx vs OpEx? And what drives this decision for a small business owner? Let’s find out.
Understanding CapEx and OpEx Historically, CapEx has meant “expenditures” rather than “expenses.” Think major purchases like property, plant, and equipment that are used over the long term. That’s because CapEx is not expensed; rather it is depreciated over its useful life. Often Capital Expenditures are financed externally through borrowing. Operating Expenses, on the other hand, are day-to-day, ordinary, and customary expenses that keep the business operational, such as for utilities, rent, lease payments, and consumable items. Also, OpEx is deductible for tax purposes.
So, where does IT spending fall? IT is not always easy to classify, having elements of both OpEx and CapEx. Certainly, hardware and software are expected to last more than one year which would typically mean they are CapEx. However, most IT purchases also include maintenance, support, and licensing costs that are ongoing and therefore, OpEx. Moreover, many IT purchases are inexpensive enough to be considered consumable for today’s businesses.