Capitalized Asset versus Expense
Posted on Wednesday, October 07, 2015
All nonprofit organizations should have a capitalization policy in place. This policy sets a threshold, above which qualifying expenditures are capitalized as fixed assets and depreciated.
Expenditures below the set amount are charged to expenses when incurred. The policy should be in writing and approved by the board of directors. The actual policy will vary depending on the size of the nonprofit, but a typical policy is to capitalize assets purchased with a cost of $500 or more and a useful life of one year or more. Having a policy in place ensures that all acquisitions of assets are consistently treated and recorded from year to year. Generally accepted accounting principles also require the capitalization of assets and related depreciation over the useful life of the asset.
Some expenditures are easy to determine whether they should be capitalized, for example buildings or computers. However, some expenditures are more difficult to determine whether they should be considered as an asset and capitalized or if they are just a repair or a maintenance expense.
Expenditures that should be considered for capitalization include the following:
- The purchase of a new asset, including all costs necessary to bring the asset to its location in working condition.
- Costs that extend the life, increase the capacity or improve the safety or efficiency of property owned.
- Costs that improve the asset as compared to its condition when constructed or acquired.
- Buildings, land
- Furniture and fixtures
- Development of a website
- Replacing an entire roof
On the other hand, expenditures that have the following characteristics should be considered a repair or maintenance cost and expensed.
- Improvements to existing assets that keep the asset in efficient operating condition.
- Expenses that restore the property to its previous condition.
- Restriping a parking lot
- Resurfacing a portion of a parking lot
- Updating information provided on a website
- Testing a fire suppression system
If your nonprofit does not have a capitalization policy in place, consider implementing one to ensure your expenditures are consistently treated and that you are following generally accepted accounting principles.
*The IRS issued new regulations for tangible personal property applicable to taxable years beginning on or after January 1, 2014. These regulations apply to all businesses subject to U.S. tax law; therefore, those exempt organizations that pay unrelated business income tax, have taxable subsidiaries or lose their tax-exempt status will need to consider the impact of these regulations.
Posted by: Carrie Minnich, CPA
Posted in Mission Minded Nonprofits
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