Office 365 benefits business in tax deduction.
Office 365 employs OPEX financial model over CAPEX.
Capital Expenditure (CAPEX) is a business expense model or practice incurred by companies to create future benefit i.e. acquisition of assets that will have a useful life beyond the tax year. e.g. financial expenditure on assets like building, machinery, equipment or upgrading existing facilities so their value as an asset increases.
On the other hand, expenses that required for the day-to-day functioning of the business, like wages, utilities, maintenance and repairs fall under the category of Operational Expenditure (OPEX). OPEX is the operational costs the business spends in order to turn inventory into useful throughput. Operating expenses also include depreciation of plants and machinery which are used in the production process.
CAPEX | OPEX | ||
| Definition: | Capital expenditures are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing asset with a useful life that extends beyond the tax year. | OPEX refers to expenses incurred in the course of ordinary business, such as sales, general and administrativeexpenses (and excluding cost of goods sold – or COGS, taxes,depreciation and interest). | |
| Also known as: | Capital Expense | Operating Expenditure, Revenue Expenditure | |
| Accounting treatment: | Cannot be fully deducted in the period when they were incurred. Tangible assets are depreciated andintangible assets are amortized over time. | Operating expenses are fully deducted in the accounting period during which they were incurred. | |
| In throughput accounting: | Money spent on inventory falls under CAPEX. | The money spent turning inventory into throughput is OPEX. | |
| In real estate term: | Costs incurred for buying the income producing property. | Costs associated with the operation and maintenance of an income producing property. | |
| Examples: | Buying machinery and other equipment, acquiring intellectual property assets like patents, furniture and fixtures | Wages, maintenance and repair of machinery, utilities, rent, SG&A expenses, license fees, office running expenses |
What is preferred: Capex or Opex?
From an income tax perspectives, businesses typically prefer OpEx to CapEx. For example, rather than buying laptops and computers outright for $800 apiece, a business may prefer to lease it from a vendor for $300 apiece for 3 years. This is because buying equipment is a capital expense. So even though the company pays $800 upfront for the equipment, it can only deduct about $250 as an expense in that year.
On the other hand, the entire amount of $300 paid to the vendor for leasing is operating expense because it was incurred as part of the day-to-day business operations. The company can, therefore, rightfully deduct the cash it spent that year.
The advantage of being able to deduct expenses is that it reduces income tax, which is levied on net income. Another advantage is the time value of money i.e. if your cost of capital is 5% then saving $100 in taxes this year is better than saving $104 in taxes next year.
However, tax may not be the only consideration. If a public company wants to boost its earnings and book value, it may opt to make a capital expense and only deduct a small portion of it as an expense. This will result in a higher value of assets on its balance sheet as well as a higher net income that it can report to investors.
Below is a comparison diagram of a customer deploying Office 365 cloud model over on-premises model:
Do contact us below to find out more about how Office 365 cloud model can help in your business.