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What is the Difference Between CapEx and OpEx? - YouTube
Channel: Wall Street Mastermind - by Sam Shiah
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YEAH, I WAS JUST WONDERING IF YOU CAN
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JUST QUICKLY EXPLAIN
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THE DIFFERENCE BETWEEN CAPITALIZING
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AND EXPENSING EITHER A PURCHASE OR SOMETHING
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IN GENERAL?
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YOU KNOW WHAT I MEAN?
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JUST THE OVERALL BIG PICTURE DIFFERENCE
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BETWEEN WHEN YOU CAPITALIZE SOMETHING,
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WHEN YOU EXPENSE SOMETHING?
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THAT'S REALLY MY QUESTION.
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SO, YOU'RE ASKING ABOUT CAPITAL LEASES VERSUS
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OPERATING LEASES?
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OH, OR ARE YOU TALKING ABOUT
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CAPEX VERSUS OPEX?
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YEAH, BASICALLY CAPEX VERSUS OPEX.
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OKAY,
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THAT'S A GOOD QUESTION.
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SO, CAPEX VERSUS OPEX,
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IT'S PRETTY SIMPLE.
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FOR ANYTHING THAT'S TREATED LIKE
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CAPEX, IT HAS TO BE SOMETHING THAT YOU'RE
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PAYING FOR TODAY,
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BUT IT'S GOING TO BE USED FOR MORE THAN
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A YEAR.
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SO FOR EXAMPLE IF YOU BUY,
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I DON'T KNOW,
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A LAPTOP FOR YOUR EMPLOYEE,
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THE USEFUL LIFE OF THAT LAPTOP IS GOING
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TO BE LONGER THAN A YEAR.
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MOST LAPTOPS, YOU CAN USE
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IT FOR MORE THAN A YEAR.
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YOU DON'T NEED TO GET A NEW ONE BEFORE...
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WITHIN THE 1ST 12 MONTHS UNLESS YOU
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DO SOMETHING CRAZY LIKE POUR COFFEE
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ALL OVER IT OR SOMETHING.
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SO THAT'S CAPITALIZED? SO THAT HAS TO
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BE CAPITALIZED. OR FURNITURE.
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YOU BUY A DESK FOR YOUR OFFICE. THAT
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HAS TO BE CAPITALIZED BECAUSE YOU'RE GOING
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TO USE THAT DESK PROBABLY FOR A PRETTY
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LONG TIME.
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AND SO YOU CAPITALIZE SOMETHING WHEN
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IT WOULDN'T BE FAIR
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TO BURDEN THAT CURRENT YEAR'S INCOME
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STATEMENT WITH THE ENTIRE EXPENSE OF
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THAT ITEM.
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DOES THAT MAKE SENSE?
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SO, IF I BUY
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A LAPTOP...
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IF I BUY A MACBOOK FOR MY EMPLOYEE AND
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LET'S JUST SAY HYPOTHETICALLY SPEAKING.
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TOP OF THE LINE
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MACBOOK IS $3,600.
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AND LET'S SAY THE AVERAGE
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USEFUL LIFE OF A MACBOOK PRO IS THREE YEARS.
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YOU CAN USE IT FOR 36 MONTHS BEFORE IT
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BECOMES OBSOLETE.
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YOU KNOW,
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THE MOTHERBOARD WILL JUST DIE AND YOU
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HAVE TO GET A NEW ONE.
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THEN...
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WE ALREADY PAID $3600 TODAY BECAUSE
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APPLE WAS GOING TO TAKE YOUR MONEY UP
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FRONT.
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BUT IN TERMS OF THE UTILITY OF
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THAT LAPTOP,
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WE'RE GOING TO USE IT FOR THE
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NEXT THREE YEARS.
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SO REALLY IT'S MORE FAIR TO SAY,
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HEY, WE INCURRED 1/3, OR WE
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USED UP 1/3 OF WHAT WE PAID THIS YEAR
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AND WE USED UP ANOTHER 1/3 NEXT YEAR
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AND THEN WE USED UP THE LAST 1/3 IN
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THE THIRD YEAR.
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AND THEN AFTER THREE YEARS, THERE'S NO MORE
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REMAINING VALUE ON THIS ON THIS
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ASSET.
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SO THAT'S WHEN YOU CAPITALIZE,
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WHICH IS WHY ANYTIME YOU CAPITALIZE SOMETHING...
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SO THAT'S CALLED PP&E.
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IF YOU BUY A LAPTOP THAT'S CONSIDERED PP&E.
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YOU BUY FURNITURE,
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THAT'S PP&E.
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YOU BUILD A NEW OFFICE BUILDING,
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THAT'S PP&E. THESE ARE LONG TERM ASSETS,
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PP&E STANDS FOR PLANT, PROPERTY, AND EQUIPMENT.
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BUT THESE ARE LONG TERM THINGS,
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THAT ARE GOING TO STAY ON YOUR BALANCE SHEET
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FOR MORE THAN A YEAR.
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SO, THE WAY WE THEN ALLOCATE THE,
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YOU KNOW,
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THREE YEARS WORTH OF EXPENSES INTO EACH
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OF THE YEARS ON THE INCOME STATEMENT IS
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BY DOING A DEPRECIATION EXPENSE.
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IN YEAR ONE,
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GOING BACK TO MY EXAMPLE OF $3600 ON
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THE MACBOOK. IN YEAR ONE,
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I'M GOING TO DEPRECIATE IT BY $1200.
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IN FACT,
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TO GO EVEN MORE GRANULAR, EVERY MONTH,
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I'M GOING TO DEPRECIATE IT BY $100.
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YEAH.
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AND THEN BY THE END OF YEAR ONE,
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MY PP&E
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ON THE BALANCE
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SHEET IS NO LONGER GONNA SAY $3600. IT'S
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ACTUALLY GOING TO SAY $2400.
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YEAH.
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BECAUSE THAT'S HOW
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MUCH IT'S WORTH NOW.
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IF I USED THIS LAPTOP FOR ONE YEAR
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AND I TRY TO FLIP THIS LAPTOP,
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I GO ON CRAIGSLIST AND I TRY TO SELL
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IT, PEOPLE AREN'T GOING TO PAY ME $3600 FOR IT
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BECAUSE IT'S USED. THEY MIGHT PAY ME $2400 FOR IT BECAUSE IT'S
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ONLY A YEAR OLD.
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THEN IN YEAR TWO WE'D
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DEPRECIATE IT ANOTHER $1200.
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SO AT THE END OF YEAR TWO ON THE BALANCE
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SHEET, THE PP&E NOW IS DOWN TO $1200.
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BECAUSE THAT'S HOW MUCH IT'S WORTH AT
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THE END OF YEAR TWO,
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THEN AT THE END OF YEAR THREE SAME THING
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HAPPENS. AND NOW THE PP&E ON THE BALANCE
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SHEET SAYS ZERO BECAUSE THE ENTIRE THING
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HAS BEEN DEPRECIATED.
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THE ENTIRE THING HAS BEEN USED UP.
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OKAY.
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AND THEN, FOR EXAMPLE THEN
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EXPENSES OR OPEX WOULD BE, SHORT TERM
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STUFF LIKE OPERATIONS, COST
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MANUFACTURING, WAGES,
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THAT SORT OF STUFF.
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THAT WOULD BE UNDER THE OPEX CATEGORY?
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YEAH SO OPEX IT
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ALL BASICALLY COUNTS TOWARDS
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THIS YEAR.
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AND ALSO, IT HAS TO BE SOMETHING THAT
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IS TAX DEDUCTIBLE.
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BECAUSE ANYTHING ON YOUR...
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ANYTHING ON YOUR INCOME STATEMENT IS
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NATURALLY GOING TO AFFECT YOUR PRETAX INCOME
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LINE ITEM.
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YEAH.
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WHICH MEANS, IF YOU ADD ANY EXPENSES ON
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THE INCOME STATEMENT AS OPEX IT'S GOING
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TO LOWER YOUR TAXES. BECAUSE IT'S GOING
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TO LOWER YOUR PRETAX INCOME,
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SO WHAT'S SOMETHING THAT
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WOULDN'T BE TAX DEDUCTIBLE?
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WELL FOR EXAMPLE, IF YOU'RE PAYING BACK
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THE DEBT THAT YOU BORROWED.
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SOMETIMES PEOPLE SAY, OKAY I BORROWED
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$100 AND NEXT YEAR I PAID IT BACK. $100
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IN DEBT REPAYMENT.
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IS THAT $100 OF OPEX THAT SHOWS UP
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ON THE INCOME STATEMENT?
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NO IT'S NOT BECAUSE THE IRS
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IS NOT GOING TO SAY YOU CAN BORROW
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MONEY AND JUST PAY IT BACK AND THEN
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PAY LESS TAXES AS A RESULT OF THAT.
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BECAUSE OTHERWISE EVERYONE WOULD
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JUST KEEP DOING THAT.
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JUST GO BORROW MONEY, PAY IT BACK, GO BORROW
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MONEY, PAY IT BACK. AND THEN THAT HELPS YOU
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AVOID TAXES. THAT DOESN'T MAKE SENSE.
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SO ANYTHING THAT CAN BE
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FULLY ALLOCATED TO THAT ONE YEAR,
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THAT ONE CALENDAR YEAR, AND IT'S TAX
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DEDUCTIBLE,
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THEN IT CAN SHOW UP AS OPEX.
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SO YEAH, IF YOU PAY SOMEONE SALARY.
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YOU'RE PAYING SOMEONE'S SALARY EVERY SINGLE
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MONTH FOR THE WORK THAT THEY DID THAT
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MONTH.
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YOU'RE NOT PAYING THEM SALARY FOR...
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HEY, I'M GOING TO PRE-PAY YOUR SALARY FOR
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THE NEXT THREE YEARS.
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YOU'RE NOT DOING THAT.
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IF I'M PAYING RENT AN OFFICE BUILDING,
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PROBABLY PAYING ONE MONTH AT A
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TIME.
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SO THAT THAT COULD BE OPEX.
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UTILITY BILLS
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IS OPEX.
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WHAT ELSE?
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IF YOUR EMPLOYEES TRAVEL,
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YOU HAVE TO PAY FOR THEIR FLIGHTS AND
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THEIR HOTELS AND THEIR DINNER
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PER DIEM.
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THAT'S OPEX.
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SO I THINK MORE OFTEN,
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THAN NOT,
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MOST THINGS ARE GOING TO BE OPEX.
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THE ONE TIME IT'S GOING TO
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BE CAPEX IS IF YOU'RE BUYING A
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LONG TERM ITEM, BASICALLY.
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WELL, THANK YOU FOR THAT,
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SAM. I APPRECIATE IT.
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SURE.
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