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We are a professional services firm with $50 million in revenue, so our capital expenditures are generally limited to tenant improvements, technology, furniture, and equipment. We are interested in feedback from other firms on how they handle the purchase of smaller items. Currently, we expense items that cost less than $1,000. This is based on the cost of each individual item on an invoice, as opposed to the total invoice or a line item on the invoice (the sum total of multiple items purchased).
Can you advise on your capitalization limit and how you determine the amount (total invoice, invoice line item, cost of each item purchased)? I would also appreciate it if you gave me a sense of your revenue size for comparison purposes and would welcome a copy of your capitalization policy. Lastly, has anyone been challenged on this by the IRS or your auditors?
Craig S. Horner (chorner@rcmd.com )
Response:
We expense individual items under $2,500, unless they are part of a what we call a complement of low-cost items that go into something bigger. So, if we order piping or parts that go into a machine installation, we add them up into a project and do not expense the items under $2,500. For PC servers, we use $1,000. The IRS auditors have made an issue of this, since these items do last more than one year.
Tony DiGirolamo (Tony@SWEETSTREET.com )
Response:
We are a $20-million firm and capitalize everything over $2,500, using the individual-item method. Our auditors have questioned some of our large group-purchase invoices, but have allowed us to expense those items in the year obtained. We are using the $2,500 hurdle because it allows us to expense all the PCs, and as we all know, they are obsolete the day we put them in service. Some of our software packages are very expensive, so we capitalize the initial purchase and expense the upgrades. This seems to work well for us and our auditors.
Linda Vance (lvance@pickeringinc.com )
Response:
The company at which I work has a similar profile to your company and has the same $1,000 threshold for capitalization. It’s applied at a “trackable item” level, irrespective of how it appears on an invoice. So, for example, if a computer was purchased for $900, along with a monitor totaling another $200, each would be expensed.
This is a policy that was established before my arrival, and if it were my prerogative, I’d have set the threshold at $500. While higher capitalization thresholds certainly make life easier from an accounting perspective, how many finance professionals would agree that buying laptop computers, for instance, that can disappear tomorrow without anyone noticing, is good policy? Moreover, since the IRS would not let a company lower its tax bill by writing off assets that clearly have a useful life beyond the year (some by definition, such as computers), it makes sense to me to take the more conservative approach.
Troy Dunkel (troydunkel@gmail.com )
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