Lab equipment costs for biotech and deeptech startups: budgeting, capitalization, depreciation

How to Manage Lab Equipment Costs for Biotech Startups

For an R&D-heavy biotech or deeptech startup, the budget is a constant balance between scientific discovery and financial survival. The large, lump-sum purchases of essential lab equipment represent one of the biggest threats to that balance. A single sequencer or mass spectrometer can derail cash flow projections and create significant downstream reporting complexities. Learning how to manage lab equipment costs for biotech startups is a core operational challenge, not just a task for a non-existent finance department. Getting it right ensures your runway is protected, your financial statements are accurate, and you are prepared for the scrutiny of investors, grant agencies, and auditors.

Budgeting for Major Lab Equipment: Capex vs. Opex

Difficulty forecasting and controlling lump-sum equipment purchases can drain runway and derail budget plans. The first step is to recognize that a significant equipment purchase is fundamentally different from recurring operational costs. This is the distinction between a Capital Expenditure (Capex) budget and an Operating Expenditure (Opex) budget. Your Opex budget covers the day-to-day costs of running the business, such as salaries, rent, utilities, and consumables like reagents and pipette tips. In contrast, your Capex budget is specifically for acquiring or upgrading major physical assets that will provide value for more than one year.

Let’s consider a running example: your team needs a new $150,000 mass spectrometer to hit a critical research milestone. Simply dropping this into your monthly operating plan would destroy your cash flow. Instead, this purchase belongs in a separate Capex budget. What founders find actually works is tying these large purchases directly to scientific or funding milestones. For instance, the spectrometer purchase is budgeted for the month immediately following your Series A close, ensuring the cash is available before the commitment is made.

This foresight allows you to strategically plan your financing. Will you use cash from your recent equity financing? Or will you explore non-dilutive options like venture debt or equipment leasing to preserve equity for hiring and R&D? Each choice has different implications for your balance sheet and cash flow. The key is to answer the question, “How do we plan for a massive, one-time purchase without destroying our cash flow?” with a well-defined Capex plan, not a last-minute scramble.

The Purchase Approval Process

This planning culminates in a formal purchase approval process. This is not about creating bureaucracy; it’s a vital fixed asset control that ensures accountability and creates an audit trail from the very beginning. For the spectrometer, this process begins with a Purchase Order (PO). The PO is the official confirmation of the order, specifying the item, technical specifications, price, and payment terms. It is the first piece of a critical documentation trail and the starting point for effective lab asset management. A typical workflow involves the lead scientist submitting a purchase request, which is then approved by the CEO or head of finance before the PO is officially sent to the vendor.

Capitalizing Lab Equipment: Your Policy for Asset vs. Expense

Once the $150,000 mass spectrometer arrives, the next question is how it appears in your books. This is where uncertainty over which assets should be capitalised and how to calculate depreciation skews the Profit & Loss (P&L) and complicates tax filings. The decision hinges on your company’s capitalization policy.

A capitalization policy is a formal set of rules that dictates whether a purchase is recorded as an immediate operating expense or as a long-term asset. For most early-stage companies, this policy has two main criteria:

• Cost Threshold: The item must cost more than a specific amount. A common capitalization threshold is typically set at “$2,500 or $5,000.”
• Useful Life: The item must have an expected useful life of “more than one year.”

Our $150,000 spectrometer easily meets both criteria. It costs far more than the threshold and will be used for many years. Therefore, it is capitalized. This means it doesn't hit your P&L as a massive one-time cost. Instead, it’s recorded on the Balance Sheet as a fixed asset, reflecting its long-term value to the company. In contrast, a $400 box of pipettes, despite being lab equipment, falls below the threshold and is treated as an operating expense, immediately impacting your P&L in the period it was purchased.

For US companies, this policy is often aligned with the IRS De Minimis Safe Harbor rule. This regulation allows businesses to immediately expense items under a certain threshold, which is currently “$2,500 (or $5,000 if the company has audited financials).” Establishing this policy early provides clear guidance for capital equipment tracking, ensures consistency in your financial reporting, and simplifies your accounting processes.

Depreciation Methods for Scientific Equipment

The spectrometer is now on your balance sheet as a fixed asset. But its value will decrease over time due to wear and tear, use, and technological obsolescence. The process of accounting for this decline in value is called depreciation. For a startup, depreciation is a non-cash expense that spreads the asset's cost over its useful life. This impacts your P&L each accounting period without an actual cash outlay, giving investors a more accurate picture of your operational profitability.

This is where a critical distinction emerges: you will almost certainly calculate depreciation in two different ways. The first method is for your investor and management reporting, and the second is for the tax authorities. These two calculations must be tracked separately in your accounting software or a fixed asset schedule.

Depreciation for Investor Reporting (US GAAP and FRS 102)

For investor reporting, consistency and comparability are paramount. US-based companies must follow “US GAAP (Generally Accepted Accounting Principles),” which requires the “Straight-Line Depreciation” method. This method allocates the cost of the asset evenly over its useful life. To calculate it, you need to estimate the asset's useful life and, in some cases, its salvage value (what it might be worth at the end of its life, though startups often assume this is zero).

The “typical useful life for lab equipment (GAAP)” is “5-7 years.” Let’s use five years for our $150,000 spectrometer. The calculation is simple: ($150,000 Cost - $0 Salvage Value) / 5 years = $30,000. This means you will record a $30,000 depreciation expense on your P&L each year for five years.

In the UK, companies typically follow FRS 102, which has similar principles. The straight-line method is also the most common approach for financial reporting to ensure the accounts present a true and fair view of the company's financial health.

Depreciation for Tax Purposes (IRS and HMRC)

For tax purposes, the rules are designed to incentivize business investment, allowing for accelerated depreciation methods. These methods let you recognize a larger portion of the expense in the earlier years of the asset's life, which can significantly lower your taxable income.

In the US, the IRS (Internal Revenue Service) allows for methods like “MACRS (Modified Accelerated Cost Recovery System)” and “Section 179 Expensing.”

• MACRS: This system assigns assets to specific classes with pre-defined recovery periods that are often shorter than their actual useful lives, allowing for faster depreciation.
• Section 179: This is a powerful tax incentive that may allow you to expense the entire $150,000 cost of the spectrometer in the year of purchase, rather than depreciating it over several years. This provides a substantial immediate tax deduction.

In the UK, the system is governed by HMRC’s capital allowances. Instead of depreciation, companies claim tax relief on the asset's cost. The Annual Investment Allowance (AIA) works similarly to Section 179, allowing many businesses to deduct the full value of qualifying equipment from their profits in the year of purchase. You should always consult with a UK-based accountant to ensure compliance and maximize available reliefs.

Audit-Ready Records: Mastering Fixed Asset Controls

Missing audit-ready documentation for equipment buys risks grant reimbursement, investor due diligence, and regulatory compliance. The final step is proving it all. How do you demonstrate to investors, auditors, or a grant agency like the “NIH (National Institutes of Health)” that the $150,000 purchase was legitimate, necessary, and properly handled? You also need proper records for standards like ISO/IEC 17025, which covers lab competence and equipment calibration.

The answer lies in maintaining meticulous records, centered on a concept known as the “Three-Way Match.” This is the core audit documentation required to verify any major purchase. It consists of three key documents that must align perfectly:

1. Purchase Order: The initial document you created, showing your official intent to buy the spectrometer for $150,000 under specific terms.
2. Vendor Invoice: The bill you received from the supplier, requesting payment of $150,000 for the specified spectrometer, referencing your PO number.
3. Proof of Payment: The record from your bank, such as a wire transfer confirmation or canceled check, showing you paid the vendor $150,000.

When these three documents align, you have an indisputable record of the transaction. This becomes critical during due diligence or when applying for reimbursement under a grant, as funders will not release funds without this level of proof. In your accounting system, whether QuickBooks for US companies or Xero for those in the UK, you should attach digital copies of these three documents directly to the transaction. This creates a self-contained, audit-ready record for all your scientific equipment costs and establishes strong fixed asset controls.

A Practical Checklist for Managing Lab Equipment Costs

Managing major lab equipment purchases boils down to a few disciplined, forward-looking practices. For biotech and deeptech startups, integrating these steps into your operations early on prevents significant financial and compliance headaches down the road.

1. Create a Capex Budget: Maintain a distinct Capex budget for large equipment purchases and tie acquisitions to your R&D and fundraising milestones.
2. Establish a Capitalization Policy: Formally define your policy based on a cost threshold (e.g., $2,500) and a useful life of more than one year. Apply it consistently.
3. Track Depreciation Separately: Remember to calculate depreciation two ways: straight-line for your investor-facing books and an accelerated method for your tax returns to optimize your tax position.
4. Enforce the Three-Way Match: Mandate the "three-way match" of a purchase order, invoice, and proof of payment for every major asset. Attach these documents to the transaction in your accounting software.
5. Mind Your Geography: Always be mindful of jurisdictional differences. US GAAP and IRS rules differ significantly from UK FRS 102 and HMRC regulations. Consult local experts.

These steps are the foundation of scalable financial management that will support your startup’s growth from seed-stage research to commercial success.

Frequently Asked Questions

Q: What is the main difference between Capex and Opex for a biotech lab?
A: Capex (Capital Expenditures) are for major, long-term assets like a centrifuge, freezer, or sequencer that you will use for more than a year. Opex (Operating Expenditures) are the recurring, daily costs needed to run the lab, such as salaries, rent, and consumables like reagents, gloves, and chemicals.

Q: Can software for lab equipment be a capital asset?
A: Yes, software can often be a capital asset. If the software is integral to the functioning of a piece of capitalized equipment or if it is a significant standalone purchase with a multi-year lifespan (like a LIMS), it typically meets the criteria to be capitalized and depreciated over its useful life.

Q: How often should a startup review its capitalization policy?
A: An early-stage startup should review its capitalization policy annually or whenever a significant event occurs, such as a new funding round that brings in new investors or the requirement for a formal audit. This ensures the policy remains appropriate for the company's scale and reporting requirements.

Q: Does claiming Section 179 tax deductions in the US make sense if my startup isn't profitable?
A: Using Section 179 to create a Net Operating Loss (NOL) can still be strategic. While you get no immediate tax savings if you have no income to offset, the NOL can typically be carried forward to reduce taxable income in future years when your startup does become profitable.