Countdown to Year-End: Written Capitalization Policy Needed

NOVEMBER 2013

 

Countdown to Year-End: Written Capitalization Policy NeededEnd this year with a “bang” by ensuring your business is able to take advantage of the de minimis safe harbor outlined in the recently released tangible property repair regulations. Our October CRI e-newsletter featured the article Final Tangible Property Repair Regulations Take Shape, which covers these newly published IRS regulations that provide a framework for when capital expenditures must be capitalized and when they can be expensed. One provision is the de minimis safe harbor, which allows taxpayers to expense certain items that would otherwise be subject to capitalization and depreciation rules. These rules are generally applicable for tax years beginning on or after January 1, 2014. This date leaves some businesses thinking that immediate action is not required before year-end, but the caveat is that a written capitalization policy must be implemented in 2013 in order to take advantage of the de minimis safe harbor.

How do the de minimis safe harbor rules work?

The new de minimis safe harbor rules allow a manageable per-item or per-invoice limit on what must be capitalized. Taxpayers with an applicable financial statement (i.e. financial statement filed with the SEC, audited financial statement from a CPA, or any other statement that is required to be provided to a federal or state government agency) may deduct items with a cost of less than $5,000 per invoice—or per item as substantiated by an invoice. Smaller taxpayers without an applicable financial statement can still expense items, but their threshold is set at a lower $500 per item or invoice.

The respective $5,000 and $500 limits are all or nothing; if a small business without an applicable financial statement buys a computer for $501, then no part of that computer can be expensed under the de minimis safe harbor.

Also keep in mind that any additional costs (such as delivery or installation fees) that are included in the same invoice must be a part of the threshold analysis. However, if these additional costs are separately invoiced, then they don't have to be included in the dollar limitations. Therefore, buyers ordering an item that will be close to the $5,000 or $500 limit may want to request a separate vendor invoice for any additional charges.

There is one stipulation that applies to both large and small businesses: in order to take advantage of these de minimis limits, the business must have related accounting procedures in effect as of the beginning of the tax year. In other words, if the business hopes to expense items under the $5,000 or $500 levels for 2014, then it needs to have a written capitalization policy in effect before January 1, 2014.

Enlist the help of CRI’s dynamite team.

If you've never adopted a formal capitalization policy or haven't looked at your legacy capitalization policy recently, then you may not be able utilize the safe harbor rules unless you take action before year-end. And waiting until 2014 to adopt this policy means waiting until 2015 to apply the de minimis expensing for tax purposes. Take advantage of this opportunity. CRI’s dynamite tax CPAs are ready and willing to answer your questions.