How to set a capitalisation threshold policy that simplifies startup accounting decisions

Foundational Understanding of Capitalization

You just approved a purchase order for ten new monitors for the engineering team. A few days later, you see the £3,000 or $4,000 charge hit the bank account. Now what? Does this count as an operational expense that reduces this month’s profit, or is it a long-term asset you should depreciate over several years? This decision seems small, but making it consistently is fundamental to accurate financial reporting.

For early-stage founders navigating growth without a full-time finance team, establishing a clear rule, a capitalisation threshold, is one of the first and most impactful steps toward financial discipline. It removes ambiguity, ensures compliance, and simplifies bookkeeping in tools like QuickBooks or Xero. This asset capitalisation threshold guide provides the direct answers and context you need to set your policy and move on.

See the accounting policy hub for related templates.

What Is a Capitalisation Threshold?

At its core, financial accounting separates purchases into two categories: expenses and assets. An expense is a cost incurred in the day-to-day running of the business, like software subscriptions or salaries, which is used up within a year. An asset, on the other hand, is a resource with economic value that a company owns with the expectation that it will provide a future benefit for more than one year, like a powerful server or specialized lab equipment.

A capitalisation threshold is the simple dollar or pound amount that serves as the dividing line. Any purchase below this value is treated as an expense. Any purchase above it is capitalized, meaning it is recorded on the balance sheet as an asset and its cost is gradually written off through depreciation. This practice is guided by the accounting principle of materiality, which ensures that financial statements are not cluttered with trivial items.

A Practical Asset Capitalisation Threshold for Your Startup

Founders need a clear, defensible number that works without weeks of analysis. The good news is that for most startups in the UK and USA, there are well-established standards that balance simplicity with compliance. Adopting a standard threshold is a core component of effective asset management for founders.

For US-based startups, the recommended threshold is $2,500. This figure is not arbitrary; it directly “aligns with IRS de minimis safe harbor election.” This tax provision is designed to simplify bookkeeping for small and medium-sized businesses, allowing you to immediately expense low-cost assets instead of depreciating them. Adopting this threshold for your accounting policy creates consistency between your books and your tax filings.

For UK-based startups, the recommended threshold is £1,000. This amount is not tied to a specific tax rule in the same way as the US figure but is a “widely accepted industry standard based on the principle of materiality.” It represents a sensible level at which an item's value is significant enough to warrant tracking on the balance sheet over several years. The reality for most pre-seed to Series B startups is more pragmatic: picking one of these standard thresholds is far more important than debating a custom number.

The "Why" Behind the Numbers: Tax Impact on Asset Capitalisation

Understanding the logic behind these thresholds helps in financial decision-making for assets and explains why the approach differs between the US and UK. Setting asset thresholds is a blend of accounting principles and tax regulations.

US Policy: Aligning with the IRS de minimis Safe Harbor

In the United States, the decision is primarily driven by tax simplification. According to the “IRS de minimis safe harbor election rules,” the safe harbor allows businesses to streamline their tax process significantly. Specifically, “the IRS de minimis safe harbor allows businesses without audited financial statements (AFS) to expense items up to $2,500, and those with AFS to expense items up to $5,000.” Most startups fall into the non-AFS category, making $2,500 the magic number.

The critical requirement is that “to use the IRS de minimis safe harbor, a business must have a written capitalisation policy in place at the beginning of the year.” This makes documenting your policy a non-negotiable step for taking advantage of the tax benefit. For official details, you can see the IRS guidance in IRS Rev. Proc. 2015-20.

UK Policy: Separating Accounting from Tax Relief

In the UK, the logic is different, separating the accounting treatment from the tax treatment. The £1,000 threshold is an accounting convention rooted in materiality. For tax purposes, UK businesses have a powerful tool called the Annual Investment Allowance (AIA). The HMRC Annual Investment Allowance guidance states that the AIA “allows businesses to deduct the full value of most qualifying plant and machinery.”

This means even if you capitalize an £8,000 piece of equipment for your accounting records, you can often deduct the full cost from your taxable profits in the year of purchase. The scale of this allowance is generous; “the AIA limit was £1 million as of 2023.” This two-track system gives UK companies flexibility, maintaining accurate asset registers for accounting while benefiting from accelerated tax relief.

Making It Official: A Simple Capitalisation Policy for Startups

An unwritten rule is not a policy. To satisfy auditors, investors, and tax authorities like the IRS, you need a simple, formal document. This document prevents inconsistent treatment of capital expenditures and demonstrates sound financial governance. Your capitalisation policy for startups does not need to be complex; a single page is usually sufficient.

What founders find actually works is a straightforward document covering six key areas. You can use the text below as a template for your own policy, customizing the bracketed information for your business.

[Your Company Name] Capitalisation Policy

1. Purpose: The purpose of this policy is to establish a clear threshold for distinguishing between capital expenditures (assets) and operating expenses to ensure consistent and accurate financial reporting in compliance with [US GAAP / FRS 102].

2. Capitalisation Threshold: The company will capitalize any single tangible or intangible asset purchase with a cost equal to or greater than [$2,500 USD / £1,000 GBP]. Purchases below this amount will be recorded as an operating expense in the period they are incurred.

3. Useful Life: To be capitalized, an asset must have an expected useful life of more than one year.

4. Scope: This policy applies to all expenditures related to the acquisition or improvement of tangible assets (e.g., computer hardware, office furniture, lab equipment) and qualifying intangible assets (e.g., certain internally developed software).

5. Bulk Purchases: If multiple similar items are purchased together in a single transaction that materially exceeds the threshold in aggregate (e.g., 20 laptops for a new team), the purchase may be capitalized as a group, even if individual items fall below the threshold.

6. Review Cadence: This policy will be reviewed annually by management to ensure it remains appropriate for the company’s operational scale and compliant with current accounting standards and tax regulations.

Store this document with your other corporate governance records. It’s a simple but powerful tool. When your company needs broader coverage, you can use a formal manual. See our accounting policy manual template for a comprehensive framework.

Applying Your Policy: Common Scenarios and Asset Capitalisation Guidelines

Asset capitalisation guidelines are best understood through real-world examples. Let's see how the policy applies to purchases at different startups.

Scenario 1: The E-commerce Office Setup

A US-based e-commerce company, using QuickBooks, is setting up a small office. It purchases 15 desks at $200 each ($3,000 total) and one high-end conference room display for $4,000. Under their $2,500 capitalisation policy, the desks are treated individually. Since each desk costs less than the threshold, the entire $3,000 is expensed immediately. The $4,000 display, however, is a single item over the threshold.

Decision: The $3,000 for desks is expensed. The $4,000 display is recorded as an asset on the balance sheet and depreciated over its useful life, typically three to five years. If your business tracks inventory, you can find related guidance in our Inventory Valuation Policy for E-commerce.

Scenario 2: The Capitalisation vs. Expense Software Question

A Deeptech startup faces a choice between buying and building software. A subscription to a data analysis SaaS tool costs $15,000 per year. This is always an operating expense, regardless of the cost, because the company is paying for a service, not acquiring an asset. In parallel, the company pays its developers to build a custom internal logistics platform.

Decision: The SaaS subscription is expensed. For the internal platform, certain direct development costs can be capitalized under accounting rules like “ASC 350-40.” This is a complex area, but the key distinction is that internal development can create a long-term intangible asset, whereas a subscription does not.

Scenario 3: The Biotech Lab Equipment

A UK-based biotech startup, using Xero, purchases a new genome sequencer for £50,000. This is well above its £1,000 materiality-based threshold, so it is capitalized on the balance sheet. For its financial statements, the company will depreciate this cost over the machine's expected useful life, perhaps seven years.

Decision: For its tax return, the company can leverage the Annual Investment Allowance (AIA). It can deduct the full £50,000 from its profits in the year of purchase, significantly reducing its tax liability, even though the asset remains on its books for accounting purposes. For practical procedures, see the Fixed Asset Policy for Growing Startups.

Putting Your Policy into Action

For founders juggling product, sales, and hiring, financial policy can feel like a distraction. However, establishing an asset capitalisation threshold is a high-leverage activity that pays dividends in clarity and compliance. It is a fundamental part of good financial hygiene.

The key steps are simple:

1. Adopt the Standard. Formally adopt the standard threshold for your geography: $2,500 for US companies to align with the IRS safe harbor, and £1,000 for UK companies as a standard of materiality.
2. Document the Policy. Use the one-page policy template provided above and save it with your official company records. This act of writing it down is what makes it official for tax and audit purposes. If you need a US-focused template, see the Accounting Policy Documentation for US startups.
3. Communicate and Apply. Share this policy with whoever manages your books, whether it’s a co-founder, an office manager, or an outsourced bookkeeping service. This ensures consistent application in QuickBooks or Xero, preventing future cleanup work.

A clear policy eliminates debate. You no longer have to wonder how to treat a new laptop or a piece of equipment. The rule is set, and your team can execute. This consistency strengthens the reliability of your financial statements, which is crucial for investor reporting and strategic planning. A scenario we repeatedly see is that startups without this policy end up with inconsistent data, making it difficult to analyze profitability or manage assets effectively. By implementing this simple policy today, you are building a scalable financial foundation for the future.

For more templates and related guides, visit the accounting policy hub.

Frequently Asked Questions

Q: What happens if I set my capitalisation threshold too high or too low?
A: Setting it too low clutters your balance sheet with trivial assets and creates unnecessary depreciation tracking. Setting it too high may cause you to expense significant long-term assets, understating your assets and overstating expenses in the short term. Sticking to standard figures like $2,500 (US) or £1,000 (UK) avoids these problems.

Q: Can I change my capitalisation policy after setting it?
A: Yes, you can change your policy, but it should not be done frequently. A change in capitalisation policy is considered a change in accounting principle and must be justified by a shift in business circumstances, such as significant growth. It should be formally documented and applied consistently from the date of the change.

Q: Does the threshold apply to the price before or after VAT and sales tax?
A: The threshold should generally be applied to the cost of the asset before reclaimable taxes like VAT. If your business can reclaim the VAT, the ex-VAT price is the true cost to your business and should be used for the capitalization decision. For non-reclaimable taxes, the total cost including tax is used.