Capital Goods - Explained
What are Capital Goods?
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Table of ContentsWhat are Capital Goods?What Constitutes a Capital Good?Capital Goods as Tax DeductionsTypes of Capital GoodsAcademic Research on Capital Goods
What are Capital Goods?
Capital goods are the assets that can be seen and touched, and help a firm in manufacturing goods and services that are further used by another firm as inputs or resources for manufacturing consumer goods. In other words, they are tangible assets like building, equipment, machinery, etc. that a business firm utilizes in order to manufacture goods and services that another firm uses as an input for manufacturing its final goods and services for consumers. Companies manufacturing automobiles, vehicles, machinery, equipment, etc. fall under the capital goods industry. The products of these companies help other companies in production, shipping, and delivery process. A firm uses capital goods such as building, equipment, automobiles, etc. in order to manufacture products and services. The ultimate objective of firms using capital goods is to produce consumer goods. Many firms such as Boeing, Caterpillar and Lockheed Martin manufacture capital goods for other company's use.
What Constitutes a Capital Good?
If a firm is unable to make use of its capital goods within a year of manufacturing, it cannot include them in the business expense deduction category for the year they purchased them. Rather, these goods need to be depreciated throughout their life. Also, firms can claim a portion of tax deductions for the years these goods are put to use. Firms use many accounting methods like depreciation, depletion, amortization, etc. in order to ascertain the depreciated or amortized amounts of these goods.
Capital Goods as Tax Deductions
Every capital good or asset experiences a reduction in its overall value every year throughout the course of its life. Amortization makes an alignment with the yearly costs associated with the asset and the revenue generated by it throughout its life. Depletion refers to an accounting method that firms use for allocating the costs of resources used by them. Firms usually ascertain the amount of depletion of capital goods by employing either cost depletion or percentage depletion method. In order to make deductions from the cost of standing timber, it is important for taxpayers to consider using the cost depletion technique. They need to ascertain the total number of recoverable units, and the number of units that were sold in the taxation period. On the other side, percentage depletion determines the ratio of material costs and the gross income earned by the firm during a specific period of time.
Types of Capital Goods
Capital goods don't always revolve around fixed assets like machinery, equipment, building, etc. The electronics sector offers a mountain of devices that serve the purpose of capital goods for others. Such devices vary from tin wire assemblies to high-resolution digital imaging systems. Service sector also makes a big use of capital goods. For instance, hair stylists using hair clips or hair pins, painters using paint on walls, musicians using musical instruments like guitar, all come under the category of capital goods used by service providers. Core capital goods refer to a category of capital goods that doesn't include aircraft and items manufactured for the Defense Department such as guns, rifles, army uniforms, etc. The Census Bureau issues a monthly Advance Report on Durable Goods Orders, and it covers information on purchases made on core capital goods which are also called core capex. This data helps in identifying the firms that are planning to grow in the near future. Durable goods are the items that are expected to be used for a period of minimum three years.