The Pyschology Behind Not Expensing Certain Big-Ticket Outlays

Bob was a great owner/CEO. I served him for about ten years before he sold his IT firm. Professional services are hard. You have to be more than 80 percent utilized to make money. Even then, the bottom line margin is thin. If you don’t believe me, ask Bob.

I set Bob’s CapEx policy at $5,000 when I joined his firm. In lay terms, we expensed fixed assets (assets with a life of more than one year) under that total.

However, I’m not black-and-white or dogmatic on this topic. A few years ago, we were updating everyone’s laptops. We couldn’t do it all at once, so we bought about 10-12 each month over six or seven months. Each laptop PC was around $1,200.

Question: Expense or capitalize after getting a bill for more than $12,000? You may think we follow the CapEx policy without giving it much thought.

What will happen when Bob looks at his P&L and sees a wonky number in office supplies for more than $10,000, and for the next several months? Incidentally, office supplies usually are about $500 per month.

Remember, margins are laser-thin in this business. We need all of the positivity we can get in this business, even on paper.

This is a case where the grey beard in his sage wisdom says, “Capitalize because expensing is psychologically destructive in this case.” Bob will appreciate this because his banker will act more favorably with these better bottom-line numbers.

Frequently Asked Questions

1. “But Mark, what about taxes? You are delaying the expense.” Says who? We can have our cake and eat it too in this case. Our tax preparer will take the Section 179 election, allowing us to deduct these laptops in full as though we had expensed them.
2. “Aren’t you playing Enron with the numbers?” Wowza, that’s harsh. In the world of materiality, this is no big deal. Our CapEx policy could be set at $1,000 instead of $5,000. This has nothing to do with playing games with the numbers or cheating. It’s about using judgment on certain outlays.
3. “What if Bob’s business was making a lot of money each month? What would you have done then?” You know the answer. Look back at the title of this article.

Remember, accountants are people, too. And that means there can be a very human element in the world of accounting.