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You'd likely be able to expense the dollar (deduct 100% of it against your taxes in the current year), versus having to capitalize the CapEx (deduct perhaps 20%
by patio11 7y ago
You'd likely be able to expense the dollar (deduct 100% of it against your taxes in the current year), versus having to capitalize the CapEx (deduct perhaps 20% of it against your taxes in the current year, via depreciation, while carrying the remaining 80% on your balance sheet for the next ~4 years in this stylized example).
The real magic, though, is flexibility: you don't have to bunch all of your server purchases into an annual (or worse) exercise, execute a buildout at a data center, and then somehow allocate them to internal teams consuming them prior to the next capacity planning exercise. You just fire API calls, and a bill arrives at the end of the month. The bill may be a lot of money, but the amount you were spending on planning, building, operating, fixing, and decommissioning your infra was a lot of money, too, split between big spiky equipment purchases and employee salaries with a dusting of leases and electricity on top.
- SilasX 7y agoAm I understanding that right, that there are major inefficiencies induced merely by how you have to expense capital purchases?
- ultraluminous 7y agoOh then you'll love finding out how much of the overall economy is guided by tax code idiosyncrasies - read up on stock buybacks vs. dividends for extra horror.
- sturgill 7y agoIn short: yes. A $1k monthly expense is a lot easier to book than a $12k purchase that depreciates over time. And from an investor point of view, if the business fails you don’t have to worry about the sell off / write down of any hardware that was purchased to get the company started. The simplification of OpEx vs CapEx is worth a decent premium, especially in the early days when no one knows if the company really has a chance and everyone is scrambling to figure out what you’ll be when you grow up (aka product / market fit).
- akgoel 7y agoDo not forget that "capital" purchases can also subject to local property taxes (called business personal property). You can imagine a large farm that pays property tax based on the farm size, but a manufacturer with large capital equipment on a small lot would not pay so much property tax. To make sure that all capital is taxed, you have to pay taxes on Capital purchases, at the market value of the item. If you can lease it instead, the tax burden is placed on the lessor. In Houston, that's around 3% of the value of the property.
- jmccaf 7y agoThe second paragraph beginning "The real magic, though, is flexibility: " describes practical benefits that are not just due to accounting.
- SilasX 7y agoRight, but it sounded like that flexibility was at least partly about not needing to buy the computational resources on a rigid schedule, which, in turn, is due to capex accounting requirements.
- sturgill 7y agoIt’s also never a convenient time to buy a new physical server and set it up in a colo facility while managing DR. Especially when your bread and butter is a CRUD app.