Intuit Academy Tax Practice Exam 2025 – 400 Free Practice Questions to Pass the Exam

Capital expenses are distinct from ordinary business expenses primarily because they relate to the acquisition or improvement of long-term assets, which contribute to a business's operational capacity over several years. Specifically, capital expenses, also known as capital expenditures (CapEx), include costs incurred for purchasing fixed assets such as equipment, buildings, and machinery or for upgrades that extend the useful life of these assets.

This distinction is crucial because capital expenses are not immediately deducted from taxable income in the year they are incurred. Instead, they are typically depreciated over their useful life, which spreads the deduction across multiple tax years, reflecting the fact that these assets provide value over a longer period.

In contrast, ordinary business expenses, often referred to as operating expenses, are incurred in the regular course of business operations and can be deducted in full in the year they are incurred. These can include day-to-day operational costs such as rent, utilities, and salaries.

The other options do not accurately describe the nature of capital expenses or their role in business accounting. For instance, capital expenses can vary significantly in size and are not defined as small and frequent; they require thorough documentation for tax purposes; and they are not always fully tax-deductible in the year incurred, as mentioned earlier.