IRS Releases Accounting Capitalization Regulations for Business Taxpayers

The information contained in this post was communicated to our business clients in writing during the first week of February, 2014.  Please contact our office for questions relating to this very complex issue.

The IRS recently released much anticipated final tangible property regulations.  These regulations provide clarity to a complex area of tax law for taxpayers who purchase tangible property or own tangible property which they improve, maintain or repair.  The regulations address the proper characterization and tax treatment of such expenditures and are certain to affect most business taxpayers for tax years beginning January 1, 2014. 

Background

Generally, under IRC Section 263(a), amounts paid to acquire, produce or improve tangible property must be capitalized. However, taxpayers are permitted to deduct ordinary and necessary business expenses, including the costs of certain supplies, repairs and maintenance under IRC Section 162(a). It is often difficult to distinguish (1) between assets that must be capitalized and property that is a material or supply, and (2) between improvement costs and repair or maintenance costs. The finalized regulations attempt to clarify when such payments may be deducted and when they must be capitalized.

Regulation Section 1.263(a)-1(f)(ii) provides a de minimis safe harbor for property acquired on or after January 1, 2014 in amounts less than $500.  

De Minimis Safe Harbor Election

A key provision in the final regulations is a revised safe harbor election that permits a deduction for de minimis amounts paid for tangible property. Under the safe harbor election, a taxpayer may elect to not capitalize (in other words, to currently deduct) specified amounts paid in the tax year to acquire or produce tangible property, provided the amounts don’t exceed applicable thresholds.

A taxpayer can elect to apply the de minimis safe harbor if:

*An accounting procedure is in place calling for:

          1) expensing amounts paid for property less than a specified amount  and/or

          2)  expensing payments for property with an economic useful life of 12 months or less;

*The accounting treatment must be consistent for both book and tax purposes; and

 *The amount paid for property does not exceed $500  per invoice.

 We recommend the accounting policy be in writing and have provided an example policy below:

(COMPANY LETTERHEAD)

ACCOUNTING CAPITALIZATION POLICY

 

WHEREAS, _____________________________ (the Company) desires to establish an accounting policy for recording costs incurred for tangible business property, be it:

WHEREAS, the Company is not required to have audited financial statements, nor has any other government or federal / state agency (other than a tax return) financial statement requirements, and thus is considered a “taxpayer without an applicable financial statement” for purposes of the de minimis safe harbor regulations under IRC Section 1.263(a)-1(f)(4), be it:

RESOLVED, that the President of the Company adopt under the IRC Section 1.263(a)-1(f)(ii) regulations the de minimis safe harbor method for deducting amounts paid for tangible property, including materials and supplies purchased during the year (but excluding inventory) as follows:

1)      expensing amounts paid for property not exceeding $500 per non-inventory item, and

2)      expensing payments for property with an economic useful life of 12 months or less,

and, be it:

RESOLVED FURTHER, that the President of the Company hereby elects to have this accounting policy in place for the calendar year 2014, effective January 1, 2014, and will direct the company’s tax preparer to include an election statement with regard to this adopted de minimis safe harbor method.

 

 

________________________________

      President

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