General Inquiries

Capitalization Threshold

  • 1.  Capitalization Threshold

    Posted 20 days ago
    I'm interested in hearing what other companies have set their capitalization threshold at and what the reasoning is behind the decision.  I've been looking for info on what would be considered the "standard practice" but all I'm coming up with a ballpark figure of $1,000 to $5,000

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    Loretta Kuust
    Controller
    HP Civil Inc
    Stayton OR
    (541) 720-0527
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  • 2.  RE: Capitalization Threshold

    Posted 20 days ago
    I generally use $1,000 per item. That being said the size of your company, amount of capital or potential capital items purchased on a recurring basis, whether you have audited statements, etc. are a few items that will drive your capitalization policy. GAAP and tax are different beasts so you'll want to consider tangible property regulations when developing your policy. Being consistent with your policy is a good start. For example, if you capitalize a $500 computer you should capitalize all $500 computers rather than capitalize them when profits are less than expected. Likewise, expensing larger items to reduce taxable income will also lead to issues if you're audited by the service or state(s). Lastly, being a former auditor it's always a good idea to run your policy by your accounting firm so they are in agreement and aware of a change in your practices. Depending on the magnitude of change it may generate a restatement of your financials.

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    Adam Stanard CPA
    Chief Financial Officer
    RW Dake Construction
    East Rochester NY
    (585) 381-2500
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  • 3.  RE: Capitalization Threshold

    Posted 19 days ago
    Loretta,

    The contractors I work with (they're all under $30 million annual revenue) mostly use $2500, their CPA's logic being that section 179 limits are high so they'll be expensed anyway for tax purposes, and $2500 is an acceptable limit as far as the IRS is concerned (I can't speak to the veracity of that; just reporting back what I've been told).

    This works very well from a day-to-day accounting standpoint.

    Then they track smaller assets in a separate GL account, like Small Tools & Equipment, or maybe use another method to tag them in their G/L software, for insurance and county property tax reporting purposes.

    David

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    David Stern,
    CCIFP
    David Stern CFO, Inc.
    Berkeley, CA
    (510) 910-1637
    david@davidsterncfo.com
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  • 4.  RE: Capitalization Threshold

    Posted 19 days ago
    I both audit and prepare taxes for construction companies.  There are several factors that I give my clients when discussing this question.  The first is remaining in compliance with the internal revenue code.  The tangible property regulations that were released and put into effect several years ago provide a safe harbor.  The IRS will not question items that were not capitalized if the item cost less than $2,500 if you do not have an "applicable financial statement" or $5,000 if you do have an "applicable financial statement".  An "applicable financial statement" is an audited statement that was audited for a purpose other than meeting the IRS requirement.  There is an annual election form that needs filed with your tax return to take advantage of the safe harbor.  You are also required to expense the purchase on your financial statements/books and records to apply for the safe harbor.  Therefore, you cannot expense it for tax and capitalize it for your financial statements.  Those limits are a good guideline.  You are going to want to have a well documented reason why your threshold is above those limits in case of an IRS audit.  I generally recommend those limits to be the maximum.

    An item to consider tax wise regarding the capitalization threshold is in regards to assets that appreciate in value.  A capitalized asset is depreciated over time, and when sold is reported on form 4797 as the sale of a capital asset.  The gain on the sale is considered ordinary income up to the amount of depreciation taken on the asset.  Any gain in excess of the depreciation taken is considered a capital gain and is taxed at the lower capital gains rates (assuming the company is a passthrough entity or a sole proprietorship).  The entire selling price is considered ordinary income if the asset was written off as an expense when purchased.  Therefore, there are potential tax savings if the asset appreciates and sells above the original purchase price when it was capitalized.  This is not a common situation for construction contractors as not many assets being purchased are going to sell for more than the original purchase price after being used for several years.

    Another tax item to consider is the new qualified business income deduction.  If the owner of the business has income over the threshold amount, the deduction is limited to 50% of wages or 25% of wages and 2.5% of the unadjusted basis of tangible property.  If the Company does not have substantial wages (e.g. the owner performs a substantial portion of the work and the company does not pay them a W-2 wage), capitalizing a larger amount of assets could potential increase the QBI deduction.

    Another item to consider is the size of the company.  A $1,000 piece of equipment is much more substantial for a company with $50,000 of gross revenue than for a company with $25,000,000 of gross revenue.  This is an analysis that the company would need to look at to determine what is the amount that becomes a substantial purchase.  Does the company require specific approval for items over a certain amount, do you only purchase a few items over a certain amount each year, would an expense of a certain amount skew the financial statements that management is using?  Those are all questions to consider.

    Another item to keep in mind while setting the threshold is the tracking of the assets.  Any asset that is capitalized needs to be tracked and the asset schedule updated when an asset is disposed of.  Most companies are going to think about this when disposing/selling a $25,000 skid loader.  I have seen many times where a $500 computer is simply taken to the dumpster when it stops working and a new one is set-up.  The computer then remains on the depreciation for several years after it was trashed because nobody thinks about updating it.  The threshold should be set high enough that it is a considerable asset that is going to be easily tracked.

    As already mentioned previously, the threshold needs to be consistently applied.  This means you need to set your threshold low enough that you are not going to have particular items that you want to capitalize below the threshold amount.  An IRS and financial statement auditor are going to have a similar perspective on this topic.

    I know that I'm throwing a lot of information out there and hope that it helps.  Feel free to reach out if you would like any additional clarification on any of the items that I brought up.

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    Dennis J. Shindle, Jr. CPA, CCIFP
    Senior Manager
    Rotz & Stonesifer, P.C.
    Chambersburg PA
    (717) 264-5961
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  • 5.  RE: Capitalization Threshold

    Posted 19 days ago
    Loretta,
    We use $2500. We felt that was low enough to capitalized what was appropriate. However, it's high enough to allow us to charge a laptop or misc furniture to an individual project.


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    Frank Carpenter
    Controller
    Morris, Inc.
    Newport Beach CA
    (949) 812-1145
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  • 6.  RE: Capitalization Threshold

    Posted 19 days ago
    I try to avoid capitalizing anything less than $1,000. My reasoning is that I want to minimize the time spent managing depreciation expense and inventory.

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    Jack Holbrook
    Vp Of Finance
    ELCCO Inc
    Lakewood CO
    (808) 877-7344
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  • 7.  RE: Capitalization Threshold

    Posted 19 days ago

    We follow the IRS guidelines which is $2,500 for non-audited financials and $5,000 for audited financials.

    Sylvia Matlock
    Corporate Finance Manager
    KS Industries, LP
    6205 District Blvd.
    Bakersfield CA 93313
    SHMatlock@ksilp.com
    Phone: (661) 617-1624

    Mobile: (623) 261-8145
    Fax: (661) 617-1770


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  • 8.  RE: Capitalization Threshold

    Posted 19 days ago
    In that there is not any real firm guidance - I honestly think it is more of a what is relevant to you and your organization. We are an underground civil company and we buy very little under $2K, so that  is our threshold. It has more to do with what is considered "disposable" for your line of work and what you deem as worth the effort to track. Along those same lines, we did find an asset tracking program that works really well for us and makes it easy for the field guys to use, so that was a big part of our decision making process.

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    Lynne Pace BS
    Chief Financial Officer
    Kinkaid Civil Construction
    Mesa AZ
    (480) 646-4438
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  • 9.  RE: Capitalization Threshold

    Posted 18 days ago
    We have used $5,000 for years now. We raised the threshold based on conversations we had with our CPA firm at the time. It allows us to expense almost all our desktop and laptop computers, which helps reduce the effort to track smaller items. I think you need think about what is worth tracking and depreciating. Is it worth depreciating a $500 asset over 5-7 years? Depends on the size of your business, but my guess is that $100 per year difference versus $500 upfront cost is immaterial.

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    Corey Hager, CPA
    Chief Financial Officer
    Miller Insulation Co., Inc.
    Bismarck ND
    (701) 258-4323
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  • 10.  RE: Capitalization Threshold

    Posted 18 days ago
    Thank you everyone, I really appreciate all the responses …. great info and food for thought!

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    Loretta Kuust
    Controller
    HP Civil Inc
    Stayton OR
    (541) 720-0527
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  • 11.  RE: Capitalization Threshold

    Posted 14 days ago
    Don't forget about those pesky personal property tax filings.  I've always used $1,000 as the minimum cap value for any one item.  That way most of the stuff I want to include in my prop tax filing is there in your capital equipment GL accounts.  It's also easier to communicate that level to anyone making purchasing decisions. This can be a challenge for computer equipment or furniture as you may be buying several items as part of one unit.  Think of buying a monitor, mouse, docking station as one computer workstation.  If the cost for one workstation is over $1,000 it gets capitalized.


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    Antonio Santos
    Owner
    Construction Information Services, LLC
    San Jose CA
    (408) 445-8638
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