Hardware Capitalisation for Deeptech Startups: When to Capitalise, Depreciate, and Track

Foundational Understanding: The Core Decision to Capitalise vs. Expense

The choice between capitalising and expensing is about matching costs to the period in which they generate value. An operating expense (OpEx), like software subscriptions or salaries, is consumed within a single accounting period and is recorded immediately on your profit and loss statement. A capital expense (CapEx), however, creates an asset that provides value over multiple periods. This asset is recorded on your balance sheet, and its cost is gradually recognised over its useful lifespan through a process called depreciation.

This is not just a technical accounting exercise. Expensing a large purchase directly reduces your profit or increases your loss for the period, which can make your operational burn rate look artificially high to investors. Capitalising the cost, however, keeps it off your profit and loss statement initially, preserving key metrics like EBITDA. Instead, the asset appears on your balance sheet, strengthening your company’s financial position on paper.

The guiding rule comes directly from accounting standards. According to GAAP/IFRS, the key principle is that if an asset provides economic benefit for more than one year, it should be capitalised. This is the primary test you should apply. If a piece of equipment will be useful for several years, it is a clear candidate for capitalisation.

However, tracking every single long-lasting purchase is impractical. This is where a materiality threshold, often called a ‘de minimis’ policy, is essential. This internal policy sets a minimum cost for an item to be considered for capitalisation. For US companies, tax regulations offer clear guidance. As the IRS Safe Harbor states, "The IRS Safe Harbor allows businesses with audited financial statements to expense items up to $5,000 per item or invoice. For those without, the limit is $2,500." A common materiality threshold for early-stage startups is $2,500. Any purchase below this amount is automatically expensed, regardless of its useful life, simplifying your bookkeeping significantly.

This creates a simple, two-step decision framework for your startup’s hardware purchasing decisions:

1. Is the total cost above your materiality threshold (e.g., $2,500)? If no, expense it as OpEx. This simplifies your accounting and focuses your efforts on what truly matters.
2. If yes, will it provide economic benefit for more than one year? If yes, you should capitalise it as a fixed asset on your balance sheet.

Adopting this approach to capital asset accounting for startups cleans up your financial reporting, providing a much more accurate picture of your operational burn versus your long-term investment in growth.

The Deeptech Grey Zone: R&D Equipment Capitalisation

For deeptech companies, the most challenging decisions involve specialised R&D hardware. A standard laptop is clearly an asset. But what about a custom-built bioreactor, a novel semiconductor testing rig, or a prototype quantum computer? The answer depends entirely on its long-term utility.

Here, another core accounting principle is critical. Under both US GAAP and FRS 102 (the UK standard), costs for equipment that has no alternative future use and is acquired for a specific R&D project are generally expensed as R&D. The key phrase is “alternative future use.” This is the core of the accounting treatment for prototype equipment expenses and other specialised R&D assets.

A scenario we repeatedly see is the classification of a key piece of lab equipment. Consider a biotech startup developing a new drug discovery platform.

• Scenario A (Expense as R&D): The team builds a highly specialised gene sequencer designed only to validate one specific, novel scientific process. It is purpose-built for a single project. Once that project concludes, the machine’s components cannot be repurposed for other experiments. Because it has no 'alternative future use,' its entire cost should be expensed as an R&D cost in the period it was acquired. This is a form of hardware investment write-off and often makes including the cost in R&D tax credit claims more straightforward.
• Scenario B (Capitalise as an Asset): The team purchases a high-performance liquid chromatography (HPLC) machine. While it will be used heavily for the current R&D project, it is a standard piece of lab equipment that will be used for countless other projects over the next five years. It has a clear alternative future use. Therefore, it should be capitalised and depreciated, strengthening the company’s balance sheet.

This same logic applies to pilot production lines. If a pilot line is built solely to prove a manufacturing concept for a single potential customer and will be decommissioned afterward, its costs are likely R&D expenses. If, however, the pilot line is designed to operate for several years to produce test batches for multiple customers and refine the process, its costs should be capitalised as a fixed asset.

Getting Depreciation Right Without Overcomplicating It

Once you decide to capitalise an asset, the next step is depreciation. This is the process of systematically allocating the asset's cost to your profit and loss statement over its useful life. For your internal management and investor reporting (known as 'book' accounting under US GAAP or FRS 102), the simplest and most common method is straight-line depreciation.

The formula is simple: (Asset Cost - Salvage Value) / Useful Life.

The reality for most pre-seed to Series B startups is more pragmatic: assume a salvage value of zero. While an asset might have some residual value at the end of its life, the effort to estimate and track it is rarely worthwhile at this stage. To determine the useful life, you can rely on standard estimates that are easily defensible. Common useful lives for book depreciation include:

• Computers and IT equipment: 3 years
• Lab and R&D equipment: 5 years
• Machinery and pilot line equipment: 5-7 years
• Office furniture and fixtures: 7 years

Using these standard lives provides a consistent basis for your lab equipment depreciation and other asset classes. For more complex situations, you might explore component depreciation for complex assets, but most early-stage companies should stick to the basics.

It is crucial to distinguish this from tax depreciation. For US tax returns, the rules are different. As the IRS notes, "For US tax returns, the IRS prescribes specific, often accelerated, depreciation schedules known as MACRS (Modified Accelerated Cost Recovery System)." MACRS often allows you to write off asset costs more quickly, which can reduce your taxable income in the short term. Let your accountant handle the tax complexities. Your job is to maintain a consistent, logical depreciation schedule for your books to accurately reflect your company's financial health to investors.

Building an Effective Asset Tracking System

Properly capitalising hardware costs for deeptech startups requires not just making the right initial decision, but also documenting it meticulously. This documentation is essential for audits, investor due diligence, and grant reporting. You do not need a complex enterprise system at this stage. A well-organized spreadsheet serves as a perfectly functional Fixed Asset Subledger, also known as an asset register.

Your asset register is the source of truth for all your capitalised assets. To ensure your fixed asset management for deeptech is robust, each entry should include:

• Asset ID: A unique identifier you assign (e.g., 001, 002).
• Description: A clear description of the item (e.g., Thermo Scientific Spectrometer).
• Purchase Date: The date you acquired the asset.
• Purchase Cost: The full capitalised cost, including shipping and installation.
• Vendor: Who you purchased the item from.
• Serial Number: The manufacturer's serial number for tracking.
• Asset Class: A category like Computers, Lab Equipment, or Machinery.
• Useful Life: The number of years for depreciation (e.g., 3, 5, or 7 years).
• Depreciation Details: The start date and calculated monthly depreciation amount.

Failing to maintain this register from day one creates a significant headache. It is much harder to build retroactively before an audit or fundraising round. Modern accounting software like QuickBooks or Xero have fixed asset modules that can help automate these calculations. Grant-funded equipment often has stricter tracking requirements, such as those outlined in federal property rules in the US.

Practical Actions for Deeptech Founders

Navigating hardware accounting does not have to be complex. For founders at the pre-seed to Series B stage, a pragmatic and consistent approach is what matters most. Getting this right isn't about perfect accounting theory; it is about building a clear and consistent financial story for your team and stakeholders.

Here are four key actions to implement today:

1. Establish a Formal Policy. Decide on your capitalisation threshold, ideally aligning with the IRS safe harbor of $2,500 or $5,000. Document this policy and apply it consistently to all purchases to ensure compliant and simple bookkeeping.
2. Ask the 'Future Use' Question. For every major R&D hardware purchase, this is the most important question: "Can this be repurposed for another project or product after the current one ends?" If the answer is a clear no, expense it as R&D. If yes, it is an asset.
3. Use Straight-Line for Your Books. Keep your internal and investor-facing financials simple and predictable. Use straight-line depreciation with standard useful lives. Your accountant will manage the different, often more complex, calculations required for tax filings.
4. Start Your Asset Register Now. Create a spreadsheet-based Fixed Asset Subledger today. Populating it as you make purchases takes minutes. Trying to reconstruct it a year later is a significant, stressful effort that can delay fundraising or an audit.

For more detailed guidance, explore the full Capex, Depreciation, and Intangibles hub for broader coverage on related topics.

Frequently Asked Questions

Q: What is the difference between capitalising hardware and treating it as inventory?
A: The distinction is based on usage. You capitalise hardware that you use in your business operations to generate value over time, like a lab machine or a computer. Inventory, on the other hand, consists of goods you intend to sell to customers. Inventory is recorded as an asset and becomes an expense (Cost of Goods Sold) only when it is sold.

Q: Can I capitalise shipping, installation, and training costs for a new piece of equipment?
A: Generally, yes for some costs. Accounting standards like US GAAP and FRS 102 allow you to capitalise all costs necessary to bring an asset to the condition and location for its intended use. This includes the purchase price, sales tax, shipping, and installation fees. However, costs for training your staff on how to use the equipment are typically expensed as incurred.

Q: How does capitalising R&D equipment affect my tax credit claim?
A: The treatment varies significantly by jurisdiction. In the US, the full cost of equipment is generally not eligible for the R&D tax credit, though depreciation may be included as a qualifying cost under certain conditions. In the UK, the rules can be more favourable, sometimes allowing a portion of capital expenditure on R&D assets to qualify for relief. Always consult a tax specialist.

Q: What do I do if I sell or dispose of a capitalised asset before it is fully depreciated?
A: When you dispose of an asset, you must remove it from your books. You will calculate its net book value (the original cost minus all accumulated depreciation). If you sell it for more than this value, you record a gain. If you sell it for less or simply scrap it, you record a loss. Your accounting software can typically handle this transaction for you.