Capitalize vs. expense decision tool · free AI skill

Analyzes an expenditure against GAAP capitalization criteria and company capitalization policy to recommend capitalize vs. expense treatment, with a documented rationale, useful-life and depreciation basis (if…

Purpose

Produce a defensible capitalize-vs-expense determination for a specific expenditure by running it through GAAP recognition criteria and the company's capitalization policy thresholds — delivering a clear recommendation, a documented rationale suitable for the audit file, and the depreciation basis when capitalization applies. Removes judgment inconsistency across the team and creates a repeatable, reviewable trail for close.

When to Use

Invoke this skill when the user asks to:

Decide whether a purchase should be capitalized or expensed
Determine the correct treatment for a repair, maintenance, or improvement cost
Classify software development or cloud/SaaS implementation costs
Evaluate whether a project's costs meet the capitalization threshold
Document capitalization rationale for the audit file or a reviewer
Split a mixed invoice into capitalizable and expensable components

Inputs Required

Before starting, collect:

Expenditure description: What was purchased or incurred, in enough detail to identify the asset category
Total amount: Dollar figure (and whether it's per-unit or aggregate for bulk purchases)
Capitalization threshold: The company's dollar policy threshold (e.g., $2,500 / $5,000); default to $5,000 if not provided and note the assumption
Asset category: Fixed asset, leasehold improvement, internal-use software, repair/maintenance, or unknown
Expected useful life: How long the item will provide benefit, if known
Nature of the cost: New asset, betterment/improvement, restoration, or routine upkeep
Reporting framework: U.S. GAAP (default) or note if IFRS is relevant

If useful life or asset category is missing, infer a reasonable value from the description and flag it as an assumption for the preparer to confirm.

Instructions

Step 1: Classify the Expenditure Type

Route the expenditure into one of the primary GAAP treatment paths, since each has different criteria:

Tangible fixed asset acquisition — PP&E, equipment, furniture (ASC 360)
Repair, maintenance, or improvement to existing asset — apply the betterment test (ASC 360)
Internal-use software — build vs. buy, and which project phase (ASC 350-40)
Cloud computing / SaaS implementation costs — hosting arrangement analysis (ASC 350-40)
Leasehold improvement — capitalize and amortize over shorter of useful life or lease term (ASC 360 / ASC 842)
Intangible or startup/organization cost — evaluate under ASC 350 / ASC 720

State which path applies and why in one sentence.

Step 2: Apply the Four GAAP Capitalization Gates

An expenditure is capitalizable only if it clears all four gates. Evaluate each explicitly:

Future economic benefit — Does the cost provide benefit beyond the current period? (If benefit is consumed within 12 months, expense.)
Useful life > 1 year — Is the expected service life greater than one reporting period?
Betterment vs. maintenance — Does it (a) extend useful life, (b) increase capacity/output, or (c) improve efficiency/quality? If yes → capitalize as improvement. If it merely restores or maintains original condition → expense as repair.
Reliable measurement — Can the cost be measured reliably and directly attributed to the asset?

Mark each gate Pass / Fail with a one-line reason.

Step 3: Apply the Company Capitalization Threshold

Even if the GAAP gates pass, apply the materiality/policy threshold:

If amount ≥ threshold → eligible to capitalize
If amount < threshold → expense under policy (note this is a policy election, not a GAAP prohibition)
For bulk/aggregate purchases, state whether policy applies per-unit or per-invoice, since this changes the outcome
Flag any expenditure within 10% of the threshold as a judgment item warranting reviewer sign-off

Step 4: Determine Depreciation/Amortization Basis (If Capitalizing)

When the recommendation is capitalize, specify:

Useful life in years, with the basis for the estimate
Method (default straight-line unless a different method is warranted)
Salvage value assumption (default $0 if not provided)
Amortization period constraint for leasehold improvements (shorter of useful life or remaining lease term)
Estimated annual depreciation = (cost − salvage) ÷ useful life

Step 5: Handle Mixed or Ambiguous Costs

If the expenditure bundles capitalizable and expensable elements (e.g., an invoice covering equipment plus installation training):

Break out each component
Apply Steps 2–4 to each separately
Present a component-level allocation table with the treatment per line

Step 6: Write the Rationale for the File

Draft a 3–5 sentence audit-file memo stating the conclusion, the controlling criteria, the ASC reference(s), and any assumptions the preparer must confirm.

Output Format

Structure: Determination summary at top, followed by the gate analysis, threshold check, depreciation basis (if applicable), and the file-ready rationale memo
Length: 400–700 words (longer if the expenditure requires component splitting)
Format: Structured document with a decision header, a Pass/Fail gate table, and a short prose memo
Sections: Recommendation (Capitalize / Expense / Split) → Expenditure Classification → GAAP Gate Analysis (table) → Threshold Check → Depreciation Basis → Component Allocation (only if mixed) → Rationale for File → Assumptions to Confirm
Tone: Controller-level — precise, decisive, cites authority; states a clear recommendation rather than hedging

Quality Checklist

Before delivering output, verify:

[ ] A single clear recommendation is stated up front: Capitalize, Expense, or Split
[ ] All four GAAP gates are evaluated with an explicit Pass/Fail and reason for each
[ ] The company threshold is applied and the outcome distinguishes GAAP eligibility from policy election
[ ] At least one specific ASC reference supports the conclusion (e.g., ASC 360, ASC 350-40)
[ ] If capitalized, useful life, method, and estimated annual depreciation are all provided
[ ] Every inferred value (life, category, salvage) is flagged in an "Assumptions to Confirm" list

Notes

The most common misclassification is treating a routine repair as an improvement — always run the betterment test (extends life, increases capacity, or improves efficiency) before capitalizing repair-like costs.
Threshold policy is a materiality election, not GAAP; an item can fail the threshold and still be technically capitalizable — say so explicitly so reviewers understand the basis.
For leasehold improvements, the amortization period is the shorter of useful life or remaining lease term — this is frequently missed and creates restatement risk.
Cloud/SaaS implementation costs shifted treatment under ASU 2018-15 — confirm whether the arrangement is a service contract (implementation costs capitalized and amortized over the term) versus an internal-use software license.

How to use this skill

This file is a Claude Code skill in Anthropic's standard format — markdown with YAML frontmatter at the top.

Installing in Claude Code:

~/.claude/skills/<folder-name>/SKILL.md — auto-loads in every session anywhere on your machine (recommended for skills you'll use across multiple projects)
<your-project>/.claude/skills/<folder-name>/SKILL.md — auto-loads only when working in that project (recommended for project-specific skills)

Restart Claude Code or open a new session to register.

Using in Claude.ai, ChatGPT, Gemini, or other AI tools:

Drag this file into a new chat, or copy and paste its contents
Send your task or request as your next message — the AI will apply the skill where it fits

For Claude Code skill details: https://docs.anthropic.com/en/docs/claude-code/skills