It’s true that a nonprofit organization’s (NPO) tax exempt status usually means there are no tax consequences to expensing or capitalizing new purchases. But it’s important to track major assets and know when to expense or capitalize.
When a new item (furniture, equipment, buildings, etc) is purchased the NPO must either expense the item in the current period/year or capitalize and track it over time. Expensed items are recognized in the current year, while capitalized items are reported as an asset and then depreciated over several years. The idea being that the item has a useful life of more than a few years and so it’s more accurate to show the expense of the item over it’s useful life. It’s also a good practice to track larger capitalized items on what’s called an Asset list. This helps the NPO to keep track of it’s valuable items.
Generally speaking, items with a useful life of more than one year are to be capitalized rather than simply expensed in the current year. The practical problem with this is that there are many small items that last more than one year and recording them on a capitalized asset list would be very time consuming and without much benefit. This is why many NPO’s establish a threshold amount for items to be expensed or capitalized. This amount will be different depending on the size of the NPO. $2500 is a good starting point.
Expensing or capitalizing repairs and maintenance costs are a bit more involved and require a few more considerations as defined under Treasury Reg. 162. Expenditures that add value or significantly prolong the life of the item should be capitalized. Alternatively if it’s just to keep the item running correctly, it’s probably an expense. For a simple sample Capitalization Policy, please contact our office!