Fixed Asset Policy for Growing Startups: Simple, Defensible Capitalization and Depreciation Rules

A Fixed Asset Policy for Growing Startups

Your startup just bought ten new laptops for the engineering team. The invoice hits your inbox. Do you record this as a single large expense that craters this month's profitability, or is it something else? This decision, often made casually by an operations lead or founder, has a ripple effect on your financial reporting, impacting everything from your monthly burn rate to how investors perceive your operational efficiency during a fundraise.

Without a clear fixed asset policy, inconsistency becomes the norm. Lacking a documented fixed-asset policy causes inconsistent capitalization across teams, derailing due diligence during future fundraises. This guide provides a practical framework for creating a simple, defensible fixed asset and depreciation policy that works for your stage, whether you are Pre-Seed or Series B.

Part 1: Defining Your Capitalization Threshold

A purchase becomes a fixed asset when it provides value to your company for more than one year. A fixed asset is not expensed immediately; its cost is spread out over its useful life. The rule that determines when a purchase becomes a fixed asset versus an operating expense is called the capitalization threshold.

This is the most important decision you will make in your fixed asset accounting. Setting a threshold creates a clear, consistent rule. For example, consider a SaaS company buying office equipment. A new $3,000 conference room TV is purchased. Since its cost is above the threshold, it is capitalized and becomes a fixed asset on the balance sheet. In the same month, they also buy a new $450 standing desk. Since this is below the threshold, it is immediately recorded as an office expense on the profit and loss statement.

So, what threshold should you choose? The guidance varies based on your location.

For US-based startups, the decision is straightforward. A standard, defensible capitalization threshold for most US-based startups is $2,500. This aligns with the IRS de minimis safe harbor election, making it a common and easily justified choice under US GAAP. Using this threshold simplifies tax preparation and is immediately understood by auditors and investors.

For companies outside the US, the rule is more flexible. In the UK, for instance, under FRS 102, there is no prescribed statutory limit. The reality for most startups is more pragmatic. For startups outside the US, a common capitalization threshold is between $1,000 and $2,500. The key is to select a reasonable figure and discuss it with your local accountant to ensure it aligns with standard practices. The goal is consistency, not perfection. Documenting this threshold is the first step in building a robust capital expenditure policy.

Part 2: The Three Ingredients of Fixed Asset Depreciation for Startups

Once an item is classified as a fixed asset, you must account for its cost over time. This process is called depreciation. It's how you match the asset's cost to the periods in which it generates revenue or provides a benefit. Choosing an inappropriate depreciation method can distort monthly burn and EBITDA, misleading founders and investors about true performance. For startups, depreciation is built from three simple ingredients.

Ingredient 1: Depreciation Method

There are several ways to calculate depreciation, but for a startup, there is only one practical choice: the straight-line method. Straight-Line Depreciation is the standard method expected by VCs and auditors for startups. This method evenly spreads the asset's cost over its useful life.

For example, a $3,000 laptop with a 3-year useful life would have a depreciation expense of $1,000 each year, or $83.33 each month. This predictability is vital for managing your burn rate and forecasting accurately. More complex methods, like declining balance, front-load the expense, which can make your early-month EBITDA look worse than it is and create confusing financial statements that require explanation during due diligence.

Ingredient 2: Residual Value Calculation

Residual value is what an asset is estimated to be worth at the end of its useful life. While a company car might have some trade-in value, what is a three-year-old laptop used by a developer really worth? For nearly all startup assets, the answer is nothing. In practice, we see that residual value for 99% of startup assets (e.g., laptops, furniture) should be set to $0.

Setting the residual value to zero dramatically simplifies your depreciation schedules. It removes the guesswork and provides a conservative, defensible position. Guessing useful lives and residual values without evidence invites audit scrutiny and potential HMRC or IRS adjustments. For a biotech startup's specialized lab equipment or a deeptech company's unique machinery, there might be an exception, but for the vast majority of assets, zero is the correct answer.

Ingredient 3: Useful Life Estimation

Useful life is the estimated period during which an asset will be of service to the company. This is not necessarily how long the asset will physically last, but how long it will be useful for its intended purpose. Your estimates should be based on standard, accepted timelines. HMRC guidance on useful economic life is a helpful reference for UK companies.

To simplify your startup asset tracking, you can use a standard cheat sheet for common asset categories.

Startup Asset Cheat Sheet: Useful Life of Assets

• Laptops & Computers: 3 Years
• Office Furniture: 7 Years
• Servers & Network Equipment: 5 Years
• Purchased Software: 3 Years
• Vehicles: 5 Years

Two special categories require specific attention. First, for Leasehold Improvements like custom build-outs in a rented office, the useful life is the shorter of the lease term or the improvement's useful life. If you sign a 5-year lease and install walls that would last 10 years, you must depreciate the cost over 5 years. Second, for Specialized Equipment relevant to biotech and deeptech startups, the useful life varies between 5 to 15 years and should be based on manufacturer guidance or industry standards. Always keep the manufacturer's documentation to support your decision.

Part 3: Documenting Your Capital Expenditure Policy

A verbal understanding is not a policy. To ensure consistency and survive due diligence, you must document your approach. This does not need to be a 50-page manual; a simple one-page document stored in Google Docs or Notion is sufficient for most startups through Series A.

Your one-page policy should include:

1. Policy Statement: A brief sentence stating the purpose, such as, "This policy outlines the capitalization and depreciation of fixed assets for [Company Name] to ensure consistent and accurate financial reporting under US GAAP / FRS 102."
2. Capitalization Threshold: State the exact amount. For example, "The company will capitalize all tangible and intangible assets with a cost of $2,500 or more and a useful life greater than one year."
3. Depreciation Method: Specify the method, such as, "All fixed assets will be depreciated using the Straight-Line method."
4. Residual Value: Define the standard. For example, "A residual value of $0 will be assumed for all assets unless specific circumstances and documentation justify a different amount."
5. Standard Useful Lives: Insert the useful life cheat sheet directly into your policy for easy reference.
6. Asset Tracking: Briefly describe the process. For example, "All fixed assets will be recorded in the fixed asset register, maintained by the Operations Manager. The register will include a description, purchase date, cost, and useful life for each asset."

How you implement this policy can evolve as you grow. Here is a 'Good, Better, Best' implementation framework for startup asset tracking:

• Good (Pre-Seed/Seed): Your policy is a one-page Google Doc. Your fixed asset register is a simple spreadsheet. Your bookkeeper uses it to manually calculate and post monthly depreciation entries in QuickBooks or Xero.
• Better (Series A): The policy is formally approved and shared with team leads. You use the fixed asset module within QuickBooks or Xero to automate the creation of depreciation schedules, reducing manual error.
• Best (Series B+): You have a significant number of assets, perhaps across multiple locations. You may use dedicated fixed asset management software that integrates with an advanced accounting system like NetSuite for cradle-to-grave asset tracking.

Practical Takeaways for Your Startup's Fixed Asset Policy

Establishing a fixed asset depreciation policy is a foundational element of financial hygiene for any growing startup. It prevents the reporting distortions and due diligence headaches that arise from inconsistency. For an e-commerce company managing warehouse equipment or a professional services firm tracking office furniture, a clear policy is just as important as it is for a hardware-intensive deeptech venture.

The path forward is clear and does not require a full-time CFO. First, decide on a capitalization threshold, using $2,500 for US companies and a locally verified $1,000 to $2,500 for UK and other international businesses. Second, commit to the Straight-Line depreciation method with a $0 residual value for all standard assets. Third, adopt standard useful life estimates for common asset classes. Finally, document these decisions in a simple, one-page policy.

What founders find actually works is focusing on creating a system that is simple, defensible, and consistently applied. Your accounting software, whether QuickBooks or Xero, can handle this process effectively. See our accounting policy hub for broader policy templates. This approach is not about achieving theoretical perfection; it's about building a reliable fixed asset accounting process that provides clarity to you, your team, and your investors as you scale.