GUIDANCE ON WHAT MUST BE CAPITALIZED VERSES EXPENSED
EFFECTIVE FOR TAX YEARS BEGINNING IN 2014:
On September 13, 2013, the IRS made major changes to the treatment of expenditures related to tangible property, including:
- Whether an expenditure can be deducted as a repair or needs to be capitalized
- How to account for materials and supplies
- Costs incurred to acquire, produce or improve tangible property.
While these rules are both lengthy (over 600 pages) and complicated, there are several steps you can take to “protect” your business from many of these changes. These steps are referred to as “safe harbors”, which, in general, means they are protected from IRS scrutiny if properly followed.
For 2013, the only safe harbor that needs to be considered is the De Minimis Capitalization Policy, which establishes a capitalization policy for your business. This policy states that amounts under a specific dollar amount will not be capitalized. The specific dollar amount has been predetermined by the IRS; $5,000 for audited financial statements or $500 for unaudited financial statements. Taxpayers must have a written capitalization policy in place at the beginning of their tax year in order to take advantage of this safe harbor. For calendar year taxpayers, this means the policy needs to be in place by December 31, 2013.
What does establishing a De Minimis Capitalization Policy do for your business?
- Starting in 2014, any amounts (determined by the individual item cost on an invoice) will be expensed for both books and tax purposes. For example, if you purchase 10 computer printers that cost $250 each ($2,500 in total), then this amount should be expensed instead of capitalized.
- Provides protection should an audit arise.
- Without a written policy, the specified dollar amount mentioned above goes to $200; regardless of whether there are audited financial statements or not. Therefore, the example in #1 would have to be capitalized instead of expensed.
If you think that the De Minimis Safe Harbor rule is too restrictive, or too low an amount, please contact our office immediately to discuss the issue.
While there are other changes in the Tangible Property Regulations that we may need to consider for your business, we will discuss these as soon as we receive additional guidance from the IRS.
As stated above, this De Minimis capitalization policy must be in place by the beginning of the year. After signing and dating the policy (by 12/31/13), please email or fax us a copy of the signed agreement, so we can keep a copy in our permanent file.
If you have any questions, please feel free to contact us.
