Not a question but clarification, Opex is taken as an expense in the time they were incurred while Capex is depreciated over a period of time. If I buy $1 million of hardware that has a proposed life time of 5 years, I will depreciate the spend over that period of time. I would get a $200k deduction every year over five years which reduces the company’s tax burden. If I spent $200k per year on Opex via cloud expenses, I would reduce my operating profit by $200k every year with no tax deduction. In general,, companies prefer CapEX over OPex for this reason. If you work for a business, you will generally be squeezed for Opex far more than Capex.
2 Answers
For tax purposes, capex is a cost that cannot be deducted in the year in which it is paid or incurred and must be capitalized. The general rule is that if the acquired property’s useful life is longer than the taxable year, then the cost must be capitalized.
So a $1M hardware spend would be amortized or depreciated over 5 years in this example, but only $200K per year would be tax deductible.
Whereas, Opex is fully tax deductible in that year. In this example, if you were renting hardware at $200K per annum that would be tax deductible. But with Opex you don’t have that up front cost.
Mark
There are a couple of points in your questions. I have worked with Telcos that did like Capex spend and went down the private cloud route. But they are few and far between.
Not all companies prefer Capex generally, simply because the money that you spend on hardware in your example could be invested in another business case to make a return on that money (companies usually have some hurdle of 17% or above). Buying tin with it would be seen as a poor investment so there is an opportunity cost as well.
A key point is that your example ALSO needs Opex – all software costs (OS/hypervisor/security/monitoring/etc), significant vendor support costs plus hands and eyes costs, utilities/DC (power, cooling, cost of DC floor space). So by the end your $1m of Capex is really $2m of cost – $1m of Capex and $1m of Opex.
Depends on the company, surely? Strapped for cash startups always go Opex. They want a small monthly bill with all the agility that this model avails to them. CapEX doesn’t make sense – too expensive, ties up much needed cash.