OpEx vs CapEx: What should SMBs choose?

February 24, 2022
Industry Commentary

There’s a lot of talk in the IT world today about OpEx vs CapEx.Now more than ever, SMBs have options for treating IT hardware and software as either an operating expense or a capital expenditure.They wonder which one is better among CapEx vs OpEx? And what drives this decision for a small business owner?Let’s find out.

Understanding CapEx and OpEx

Historically, CapEx has meant “expenditures” rather than “expenses.” Think major purchases like property, plant, and equipment that are used over the long term. That’s because CapEx is not expensed; rather it is depreciated over its useful life. Often Capital Expenditures are financed externally through borrowing. Operating Expenses, on the other hand, are day-to-day, ordinary, and customary expenses that keep the business operational, such as for utilities, rent, lease payments, and consumable items. Also, OpEx is deductible for tax purposes. 

So, where does IT spending fall? 

IT is not always easy to classify, having elements of both OpEx and CapEx.Certainly, hardware and software are expected to last more than one year which would typically mean they are CapEx. However, most IT purchases also include maintenance, support, and licensing costs that are ongoing and therefore, OpEx. Moreover, many IT purchases are inexpensive enough to be considered consumable for today’s businesses. What has muddied the waters even more is the wide availability of “as a service” IT offerings for small businesses:

  • Infrastructure as a Service (IaaS)
  • Desktop (or Device) as a Service (DaaS)
  • Platform as a Service (PaaS)
  • Software as a Service (SaaS). 

On-demand, cloud-based services like these offered on a monthly subscription basis are similar to a lease and qualify as OpEx.

Why do SMBs prefer “As a Service” offerings?

“As a service” offerings, and the ability to treat IT expenses as OpEx are popular with SMBs and perceived favorably for several reasons:

  • The “pay for what you use” model with “bite sized” increments provides flexibility.
  • IT capabilities like storage and bandwidth can be added or removed as needed, which is advantageous for businesses, especially in unpredictable or high growth environments.
  • Maintenance and support costs are rolled into the monthly subscription payment which simplifies expense tracking
  • Hardware is usually refreshed periodically without additional cost to the subscriber.
  • More scalable (even though large increases can result in painful monthly bills, they can be implemented quickly without outside financing.)
  • Requires less in-house IT staff and expertise. 

However, the “as a service” model also means that you don’t own your IT hardware or software and therefore have less control over important elements of your business. Also, the total cost of ownership can sometimes be higher with a subscription versus a purchase in cases where the same technology is used for several years without replacement.  

Also Read: How FreedomVoice and Uplevel are helping Small Business Phone Solutions?

Looking at the other side of the Coin

There are indeed some IT expenses that are not done through a subscription-based “ as a service” model.

Examples might include laptops, computers, or perpetual software licenses. 

Should a small business try to expense such IT hardware and software instead of capitalizing it if it is possible according to tax rules and accounting principles? The answer is not really obvious. 

OpEx is generally favorable from a tax standpoint. Expenses are deductible when incurred, rather than over time. The time value of money says that paying less tax this year is better than paying less next year. Also, since ongoing IT maintenance and support costs are OpEx, it may be preferable to categorize the up-front costs as OpEx as well. However, treating IT assets as capital adds a predictable smoothness to expenses over the lifetime of the asset, which is preferred by many financial types. Businesses also generally have different approval processes for capital vs operating expenses. Even for an SMB, it may be harder to spend on CapEx compared to OpEx.

So when it comes to IT solutions, what’s the best among these options - pay for IT monthly as a service (OpEx), purchase or license on your own products and depreciate over time (CapEx), or purchase your IT and treat it as a business expense (OpEx). The answer is, there’s no obvious preference.The choice depends on the goals, policies, and priorities of your business as well as cash availability. 

About Uplevel Systems

Uplevel Systems, as a small business IT infrastructure managed service provider, enables any of these options. Uplevel’s subscription offering is the most popular with SMBs, but some prefer Uplevel’s new equipment purchase program and use a CapEx model.