What is a Capital Outlay?
Capital outlay, also called capital expenditure, is money or the equivalent that is spent to purchase something or improve upon something that is already held, and that will add value to a business for a length of time over a certain period, typically more than one year. Buying a new car or investing in new office equipment for a business are two examples. Governments consider capital building roads, remodeling buildings and other projects that their agencies benefit from as capital expenditure.
The use of capital outlay is primarily for accounting purposes. In most countries, it is also considered for tax purposes, as some of the expenditures are deductible. The key point in considering what constitutes a capital outlay expense is the way it is valued over time.
Determining what defines an outlay is important for accounting because it determines how the expenses will be calculated over time. For instance, if a business acquires a new property, that would be considered capital outlay. If that building needed repairing in the future, it becomes less clear how to classify the money for repairs.
The main determining factor is what the value of the property would be after a repair. If the repair was made that only fixed the existing problem, for example a faulty heater, it would be arguable that this does not increase the value over time but instead merely maintains the value. If this were the case, it would not be considered capital outlay, but rather a deductible expense.
If the heater was totally replaced with a new and improved heater, this would be considered capital outlay. The expense of replacement would be calculated and deducted over the estimated length of the life of the heater. If, however, it were just repaired and considered a current deductible expense, the amount it cost would be taken from the budget of the current year.
Determining capital outlay can largely impact a business in several ways. This determination is not only applicable to accounting, thereby determining the value of the business, but can also apply to the amount of taxes owed. Depending on particular tax laws of a given locale, the amount that can be considered deducted from taxes owed for a year will depend on money spent for things such as capital outlay. There are typically limits on the amount that can be deducted. For instance, you may only be able to deduct a certain percentage for construction improvement.
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