What IT budgeting is preferred: CapEx or OpEx?

From an income tax perspective, business typically prefer OpEx to CapEx when it comes to IT budgeting and expenditures.  For example, rather then buy servers and tablets outright, a business may prefer to lease it from a vendor for 3 years with a low monthly payment.  This is because buying equipment is a capital expense.  So even though the company pays for the equipment up front, it can only deduct a small portion of the expense in that year.

On the other hand, the entire amount of the lease which is consisted an operating expense because it is an expense takes place day to day, can rightfully be deducted because the cash was spent that year.

The advantage of being able to debut expense 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 $100.00 in taxes this year is better than saving $104.00 in taxes next year.

However, taxes 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.

Also, in the pursuit of maintaining a lean balance sheet with optimum cash flow, boards are cutting back on new CapEx, opting wherever possible to fund projects with  OpEx instead.  One reason for this is the rapid changes in technology.  For example, new servers run faster, use less energy and lowers your maintenance cost.  It doesn't make sense to sink money into equipment that is surpassed by the next model in 18 to 24 months.

Organization usually want to direct direct their investments toward revenue generating activities.  This is why organizations prefer to lease rather than purchase and not tie up capital.  G/S Solutions offers 3 types of leases:

  1. IT Refresh Lease – this is a lease where G/S Solutions allow clients to stay current on technology.  This type of lease is typically treated as a reoccurring monthly expense over the life of the lease and includes the flexibility to return, extend or purchase equipment on a system by system basis at the end of the lease.
  2. Operating Lease – This lease allows clients to lease equipment and will little impact on cash flow.  An operating lease is not capitalized; it is accounted for as a rental expense in what is known as “off balance sheet financing.” For our clients, the asset being leased is accounted for as an asset and is depreciated as such.
  3. G/S Custom Lease – We write our own leases, therefore, we can develop a lease to fit your current or future needs.  For example, a client may need to be billed quarterly not monthly or the lease needs to include both software and hardware.  We have the flexibility to write the lease to satisfy our client business needs.

 

 

 

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What IT budgeting is preferred: CapEx or OpEx?
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From an income tax perspective, business typically prefer OpEx to CapEx when it comes to IT budgeting and expenditures. In this article we explain why.
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