When is a purchase capitalized as a fixed asset instead of expensed?

A purchase is capitalized when it benefits the business beyond the current year. Instead of hitting expense right away, the cost goes on the balance sheet as property, plant, and equipment and is depreciated over its useful life (ASC 360).

The four tests

• Tangible: Equipment, computers, furniture, vehicles, or buildings. Internal-use software follows its own guidance (ASC 350-40).
• Used in operations: Held to run the business, not for resale. Goods bought to sell are inventory.
• Useful life over one year: The asset serves more than one annual period.
• Above the capitalization threshold: The cost exceeds the dollar amount in the company's capitalization policy.

Where the threshold comes from

GAAP doesn't set a dollar threshold. Each company picks one based on materiality, writes it into its fixed asset policy, and applies it consistently. The policy also states whether a batch of low-cost items bought together, such as 40 laptops, is capitalized as a group or expensed item by item.

The IRS de minimis safe harbor is a separate tax rule. It lets a business deduct items costing up to $2,500 per invoice or item, or $5,000 with an applicable financial statement (such as audited financials), and it's elected each year on the tax return. Many companies match their book threshold to it, but the safe harbor doesn't decide GAAP treatment.

What goes into the cost

The capitalized cost includes everything needed to get the asset ready for use: purchase price, sales tax, freight, installation, and testing. Training, routine maintenance, and service contracts are expensed or recorded as prepaids, not added to the asset.

On an existing asset, a repair that keeps it working is expensed, and an improvement that extends its life, adds capacity, or improves efficiency is capitalized.

Examples with a $2,500 threshold

Catching capitalizable spend in Ramp Stack

1. Write the capitalization policy into a skill, with the dollar threshold and the useful life for each asset class. Ramp Stack agents already know general capitalization rules, and the skill adds the company's own.
2. The agent reviews bills, card charges, and GL entries coded to expense, and flags purchases above the threshold that look like fixed assets.
3. For each flagged purchase, it reads the invoice to pick up costs that belong in the asset, such as freight and installation.
4. An accountant makes the call on borderline items, such as a repair versus an improvement, and edits or rejects the agent's proposal.
5. For approved items, the agent drafts the reclassification entry and adds the asset to the fixed asset schedule so depreciation can start.
6. The entry posts once approved, and the Session Audit Log records each step the agent took.