Key GAAP Capitalization Rules

Summary

Under US GAAP, you must capitalize a cost if it provides a future economic benefit extending beyond one fiscal year and meets or exceeds your company's capitalization threshold. Instead of expensing the cost immediately, you record it as an asset on the balance sheet and allocate the cost via depreciation or amortization over its useful life.

Key GAAP Capitalization Rules

Materiality and Thresholds

GAAP technically does not establish a minimum dollar threshold for capitalization; however, for administrative convenience, most companies set internal thresholds (often between $1,000 and $5,000) for individual assets to avoid tracking minor, immaterial items.

Asset Valuation

The capitalized cost of an asset includes the purchase price plus all expenditures necessary to get the asset ready for its intended use. This includes freight, sales tax, installation, and initial testing costs.

Interest Capitalization

If you are constructing a long-term asset for your own use or sale, you must capitalize the interest costs incurred during the construction period.

Rules by Asset Type

Property, Plant, and Equipment (PP&E)

Tangible, long-lived assets used in operations (machinery, buildings, computers) are capitalized. Routine repairs and maintenance are expensed as incurred, but significant overhauls that extend the useful life of an asset beyond its original estimate can be capitalized.

Internal-Use Software

Costs incurred during the preliminary project stage (concept/evaluation) must be expensed. Costs during the application development stage (coding, testing, hardware installation) must be capitalized. Post-implementation training and maintenance are expensed.

Research and Development (R&D)

Most R&D costs must be expensed as they occur because their future benefits are highly uncertain, though certain software to be sold externally has specialized capitalization rules.