In the past 2 to 3 years Microsoft’s messaging has included the terms CAPEX and OPEX and I had assumed that everyone understood the terms. Recently a conversation with fellow partners revealed that the terms have been received with ambiguity. In that conversation which happened by email I wanted to capture this note for the general public which helps to clarify why OPEX maybe preferable for tax avoidance on what are truly operating expenses.
Talk about swapping capex to opex is essentially related to tax avoidance and not reducing payroll costs.
In capital expense (CAPEX) you incur a large expense in one year and depreciate it over subsequent years taking small write offs. This model reflects a consumption of the investment’s value over multiple years.
In operating expenses (OPEX) you incur the expense and write it off in the same year. You therefore do not pay income tax one those expenses that are allotted to the use of the resources in that year.
So with CAPEX in the one year you layout money for a big expense but you cannot entirely write it off against revenue in that year. In subsequent years you don’t layout any money and can write off a portion of the money you spent in the first year.
There are a number of challenges about CAPEX, You make a big purchase of assets and pay tax on like it was revenue. With OPEX you never pay tax on the revenue used to cover the expense. There are also agility issues in that you are stuck with a 5 year investment and cannot change because you laid all the cash out front.
So when it comes to leasing or fees for services there are often advantages in switching to an OPEX model where you can pay in pre-tax dollars for the resources you use in that year.
Cloud based services are OPEX expenses.