Capital expenditures (CAPEX) are spending on long-lived assets — equipment, real estate, technology, vehicles — that are capitalized on the balance sheet and depreciated over their useful life rather than expensed immediately. Section 179 and bonus depreciation allow many businesses to deduct CAPEX in the year of purchase.
CAPEX represents investments in the productive capacity of the business. When a business buys a $100,000 piece of equipment, that $100K doesn't hit the income statement as an immediate expense — it becomes an asset on the balance sheet, then depreciates over its useful life (say, $20K/yr for 5 years under straight-line). This matching of cost to the period of benefit is the core accounting principle behind CAPEX treatment. In cash flow, CAPEX is reported on the cash flow statement under 'investing activities.' It's the key variable in the free cash flow formula: Free Cash Flow = Operating Cash Flow - CAPEX. High-CAPEX businesses (manufacturers, airlines, telecom) have lower free cash flow relative to operating income. Asset-light businesses (software, consulting, staffing) have minimal CAPEX and high free cash flow. For tax purposes, Section 179 of the tax code allows small businesses to immediately deduct qualifying equipment and property (up to $1.16M in 2023) rather than depreciating it over multiple years. Bonus depreciation allows 100% first-year expensing of qualifying new and used assets (phasing down after 2022). These provisions effectively convert CAPEX to immediate tax deductions — reducing the after-tax cost of capital investment.
Depends on tax situation, cash flow, and how long you'll use the asset. Buying with Section 179/bonus depreciation can produce a large first-year tax deduction — valuable if you have high taxable income. Leasing keeps payments as OPEX (immediately deductible each year) and preserves borrowing capacity. Equipment financing splits the difference: you own the asset, preserve cash, and can still take Section 179.
Free Cash Flow = Operating Cash Flow - CAPEX. A year with heavy CAPEX spending (new location buildout, major equipment purchase) will show low or negative free cash flow even with strong operations. Lenders underwriting on DSCR typically add back depreciation to operating income — because depreciation is a non-cash OPEX charge against CAPEX already spent. This normalizes cash flow across periods of uneven CAPEX spending.
Maintenance CAPEX: spending to keep existing assets operational (replacing worn equipment, refurbishing facilities). Necessary just to maintain current revenue levels — not discretionary. Growth CAPEX: spending on new capacity that increases revenue potential (new locations, production expansion, new product lines). Investors and analysts focus on growth CAPEX as the driver of future earnings; maintenance CAPEX is a cost of staying in business.