Budget Box: Operating Expense vs. Capital Expense: What’s the Difference?
Wed, 02/24/2021 - 11:41am
Sometimes, accounting regulations can seem confusing and prompt questions of why certain expenses are categorized as an operating expense versus a capital expense.
Often, two factors determine whether a repair is an operations expense, versus a capitalized expense -- lifespan and value. An operations expense repair keeps equipment or buildings functioning on the same level. Repairs considered to be an improvement to the physical space or which increase the asset’s value are considered a capitalized expense. Painting is a good example of understanding the IRS guidelines on categorizing repairs as operating or capital expenses. Even as a large expense, painting or repainting your office building is generally considered to be a part of routine repairs and maintenance which would be funded through the operating budget. However, if you paint your building as part of a larger renovation, which is considered a capital improvement to your property, then the painting can also be capitalized and funded through the Capital Reserves Fund.
This year, Landings Harbor is completing $40,000 in repairs to a forklift (currently valued at $267,000). These repairs will bring the forklift back to normal operating function, help reach its useful life to the currently suggested 2025 replacement year, but will not add additional value to the asset. Therefore, the cost to repair the forklift comes from the operating account as an expense.
The Landings Association also works with an external accounting firm to closely review the categorization of operating vs. capital expenses in order to maintain consistency and reliability in financial recording and reporting.
This article was originally published by The Landings Association on their website.
Visit landings.org to read the original article.