Expenditure

An expenditure is the outlay itself: the cash or cash equivalent paid out, or the liability incurred, to acquire goods, services or assets. It is measured at the moment of the outlay, and it is independent of the period in which the resulting cost is recognized. The word carries a second, narrower meaning in state and local government accounting, where an expenditure is an amount reported on a governmental fund’s operating statement, recognized in the accounting period the fund liability is incurred rather than the period the resources it buys are consumed.

That is not loose usage on the tax side either. For purposes of the capitalization regulation, in the case of a taxpayer using an accrual method of accounting, the terms amount paid and payment mean a liability incurred, and a liability may not be taken into account under that section prior to the taxable year during which the liability is incurred (26 CFR 1.263(a)-1(c)(1)). For a business on that method an unpaid supplier invoice can therefore already be an expenditure. What makes a cost incurred is set out in accrual accounting, and the balance that recognition leaves behind is in accruals.

Expenditure Versus Expense

The outlay and the recognized cost are two different events. An expenditure is the moment money or an obligation goes out. An expense is the cost a period reports as assets are used up or liabilities are incurred, and that element, along with the three it sits beside, is defined in the income statement.

One outlay can turn into expense across several later periods, or into none of them yet, while the business still holds what it bought. Where a payment runs ahead of the benefit and parks on the balance sheet is set out in deferral.

Capital Expenditure Versus Revenue Expenditure

US tax law sorts expenditures by whether the outlay has to be capitalized. Except as provided in chapter 1 of the Internal Revenue Code, no deduction is allowed for any amount paid for new buildings or for permanent improvements or betterments made to increase the value of any property or estate, or for any amount paid in restoring property or in making good the exhaustion thereof for which an allowance is or has been made (26 CFR 1.263(a)-1(a)). The statute it implements sets out the same two limbs in older wording, an amount paid out and an amount expended (26 U.S.C. 263(a)).

The regulation gives seven examples, and the list runs wider than the obvious purchases. It opens with an amount paid to acquire or produce a unit of real or personal tangible property, then an amount paid to improve one, then an amount paid to acquire or create intangibles. It goes on to an amount paid or incurred to facilitate an acquisition of a trade or business, a change in capital structure of a business entity, and certain other transactions, and to an amount paid to acquire or create interests in land, such as easements, mineral interests or timber rights (26 CFR 1.263(a)-1(d)).

Revenue expenditure is the textbook name for the other side of that line. The Code’s route there is a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business (26 U.S.C. 162(a)). Capitalization overrides that deduction rather than sitting beside it. The deductions specified in the part of the Code that carries the trade or business deduction are allowed subject to the exceptions provided in part IX, relating to items not deductible (26 U.S.C. 161), and the capital expenditures section sits in part IX (26 U.S.C. 263).

Small outlays have an election out of that sorting. A taxpayer with an applicable financial statement, meaning one filed with the SEC, a certified audited statement, or a statement required by another federal or state agency, that has written accounting procedures in place at the start of the taxable year and expenses the amount on that statement, may elect the de minimis safe harbor where the amount paid does not exceed $5,000 per invoice, or per item as substantiated by the invoice (26 CFR 1.263(a)-1(f)(1)(i) and (f)(4)).

A taxpayer without such a statement gets a lower ceiling, and the live figure is not the one printed in the regulation. That limit was raised from $500 to $2,500 per invoice, or per item as substantiated by the invoice, effective for costs incurred during taxable years beginning on or after January 1, 2016 (IRS Notice 2015-82). The regulation still shows the older amount because it lets the IRS reset the limit by published guidance instead of by amending the text.

Expenditure in a Governmental Fund

For a state or local government the word is not a synonym for spending. It is the operating-statement measure the governmental funds use, and those funds report a balance sheet and a statement of revenues, expenditures, and changes in fund balances (GASB Statement No. 34, paragraph 78). Financial statements for governmental funds should be presented using the current financial resources measurement focus and the modified accrual basis of accounting, as the terms are discussed in NCGA Statement 1, as amended (the same Statement, paragraph 79).

That basis fixes when the amount lands. Expenditures should be recognized in the accounting period in which the fund liability is incurred, if measurable, except for unmatured interest on general long-term liabilities, which should be recognized when due (the same Statement, Appendix D, Codification Instructions, Section 1100, paragraph .110a).

The consequence surprises anyone coming from business books. General capital assets most often result from the expenditure of governmental fund financial resources, and they should not be reported as assets in governmental funds but in the governmental activities column of the government-wide statement (the same Statement, paragraph 80).

The Board’s own reasoning treats the two measures as ones a single statement cannot carry at once. It is not possible to produce a useful operating statement that reports both expenses for economic resources consumed in providing services and expenditures of current, or even total, financial resources to acquire resources (the same Statement, Appendix B, Basis for Conclusions, paragraph 254).

A Worked Example

Say a firm buys office equipment for cash and writes it off evenly over a life it has assumed rather than one a rule fixed for it.

Cash paid for the equipment in Year 1         12,000
Expenditure recorded in Year 1                12,000
Expenditure recorded in Years 2, 3 and 4           0
Cost recognized in each of Years 1 to 4        3,000

The outlay happens once and the recognized cost happens in every period the asset is used, so on this purchase the two never line up, and only the outlay is the expenditure. How a write-off like that is reported and reconciled at the year end is in year-end accounting services.

The same purchase inside a governmental fund lands differently. It is an expenditure of that fund rather than an asset of it, so nothing is left on the fund’s own balance sheet.

Common Questions

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