Should I Buy Equipment as a Direct or Indirect Cost?

Double-counting the purchase price of equipment (as both a direct and indirect purchase) is a major weakness in an accounting system, and your company may be one of the unknowing culprits. For example, your company buys equipment under a reimbursable federal award for $10,000 and you bill the government for the full amount plus indirect costs and fixed fee. Your company subsequently capitalizes the equipment as a fixed asset and books depreciation expense, thus increasing your indirect rates.

As a result, you charged the government twice: once at 100% for a direct cost and again at your depreciation percentage as part of depreciation expense. Accountants will tell you the purchase is a fixed asset, but in reality, you don’t own the equipment in this example. Therefore, it is not your asset to capitalize. In addition, the government reimbursed you 100% of the cost, therefore, your company has an asset that isn’t yours, and if it were, you have no cost basis.

When purchasing equipment, you need to evaluate the situation using the following criteria:

a) will the company need the equipment for more than one project,
b) how long will it take to depreciate the equipment in relation to your government-contract term,
c) capitalization thresholds,
d) the type of federal award the equipment is purchased under and e) operating lease options, etc.

As you can see, this is not a simple decision and needs to be addressed on a case-by-case basis.

 

For more information, please visit www.MokerCPA.com

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