Q:

What is the difference between a capital expense and a business expense?

A:

Business expenses are expenditures incurred during the day-to-day operations of a business, while capital expenses refer to investments made in capital assets in anticipation of future benefits, explains Caron Beesley for the Small Business Administration. Business expenses include salaries and rents, while capital expenses include money spent on equipment and vehicles.

Differentiating between a capital and a business expense is not necessarily straightforward, warns FindLaw. For instance, simple repairs on a capital asset are considered a business expense under the Internal Revenue Service tax code. However, improvements to the same asset, such as adding a new room to a building, are considered a capital expense. In general, modifications that lengthen the life of a capital asset, increase its value or make possible new uses are considered capital expenses by the IRS and taxed as such.

Business owners who use personal property such as cars or work from home are also required to distinguish between business and capital expenses by the IRS, notes Beesley. Repairs, utilities and other expenses incurred in the normal running of a household can be treated as a business expense and deducted from taxes as long as certain requirements are met. The same rules apply to personal vehicles used for business purposes.

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