CapEx (Capital Expenditures) vs. OpEx (Operating Expenditures)
With the rise of cloud solutions several years ago, many Senior Living organizations have begun shifting IT expenses to an OpEx (Operating Costs) model. So many of these long term care facilities are well capitalized when they are built and pay up front for the hardware they need to get their facility operational. After being in business a few years, they face ongoing challenges with margins, billings and reimbursements that make it much more difficult to accommodate capital expenditures on an ongoing basis.
Finding ways to fit ongoing IT expenses into their operating expenditures is far more practical and accessible than relying on influxes or accumulated capital to make needed improvements to technical infrastructure.
From an income tax perspective, businesses typically prefer OpEx to CapEx when it comes to IT budgeting and expenditures. For example, rather than buy servers and tablets outright, a business may prefer to lease from a vendor for 3 years with a low monthly payment. This is because buying equipment is a capital expense. Even though the company pays for the equipment up front, it can only deduct a small portion of the expense in that year as depreciation on the assets purchased.
On the other hand, if a company took a leasing mindset, the entire amount of the ongoing lease payments are considered an operating expense because it is an expense that takes place day to day. This means it can rightfully be deducted because the cash was spent that year.
While leasing equipment is one option, a stronger, more flexible and modern option is to contract with an IT managed services provider who can include these expenses alongside additional services in a predictable monthly invoice. From a tax perspective, the ability to deduct these operating expenditures remains the same, while at the same time, your business can benefit from a combination of cloud solutions, network management, endpoint hardware, software and supporting services to help improve performance and reliability of your IT and network environment.
Pro tip: Be sure your Managed Services provider has an intimate knowledge of your business and industry. This provides the best support for your end users and improves your employee satisfaction with the engagement.
The key advantage of being able to deduct expense is that it reduces corporate income tax, which is levied on net income. Another advantage is the time value of money: if your cost of capital is 5%, saving $100.00 in taxes this year is better than saving $104.00 in taxes next year.
In the pursuit of maintaining a lean balance sheet with optimal cash flow, owners and boards are frequently cutting back on new CapEx (capital expenditures), opting wherever possible to fund projects with OpEx instead. One reason for this is the rapid changes that take place in technology. For example, new servers run faster, use less energy and lower your maintenance cost. It doesn't make sense to sink money into equipment that is surpassed by the next model in 18 to 24 months. At the same time, employees show greater job satisfaction with refreshed technology and the improved speed and reliability that newer infrastructure provides.
LTPAC organizations typically want to direct their capital investments toward improving patient care activities and expanding operations. This is why senior living and long term care organizations are shifting to OpEx IT spending rather than continuing to tie up capital in technology products.