AI-900: CapEx vs OpEx in Cloud Computing: What’s the Difference?

Learn the difference between capital expenditure (CapEx) and operational expenditure (OpEx) in cloud computing, and how they affect your IT budget and tax deductions.

Question

Tradewinds Traders is planning to migrate to Azure cloud services. Management has questions regarding the expenditure once they migrate. You have been asked to research expenditure types and how they differ. Based on your research, you have identified two types of expenditures that are relevant to Cloud migration. Capital Expenditure (CapEx) and Operational Expenditure (OpEx). Which of these expenditure types require the upfront spend on physical infrastructure that can then be deducted as an expense over time?

A. Capital Expenditure (CapEx)
B. Operational Expenditure (OpEx)

Answer

A. Capital Expenditure (CapEx)

Explanation

Capital Expenditure (CapEx) is the upfront spending of money on physical infrastructure and then deducting that upfront expense over time. The upfront cost from CapEx has a value that reduces over time.

The correct answer is A. Capital Expenditure (CapEx). Capital expenditure is the cost a business incurs to acquire assets that will provide benefits beyond the current year. CapEx is also referred to as PP&E, which stands for Property, Plant, and Equipment. When a company invests money, uses collateral, or incurs debt in order to acquire new assets or increase their value over time, they incur capital expenditures. So, capital expenditures are usually long-term investments in the business. Also, CapEx IT spending is often a one-time purchase of a specific high-dollar fixed asset during a single tax year, with little ongoing costs during that period.

By contrast, Operational Expenditure (OpEx) is like a pay-as-you-go service. You can deduct this expense in the same year you spend it. There is no up-front cost, as you pay for a service or product as you use it. It is as the name suggests, the expense of daily operation. Cloud computing operates on an OpEx model, where resources and services are available on-demand, and IT spend fluctuates based on consumption.

Therefore, CapEx requires the upfront spend on physical infrastructure that can then be deducted as an expense over time, while OpEx does not.

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