For years, the IRS has tried to wrap its arms around rules related to the capitalization vs. deductible repairs and supplies for tangible property. In September 2013 – two years after the proposed regulations were issued – the IRS issued the Final Tangible Property Regulations. For many, the final regulations provide a more generous de minimis expensing rule than what was anticipated. Under the de minimis safe harbor election, taxpayers may elect to expense amounts paid for tangible property, up to $5,000 per item or invoice.
To qualify for the $5,000 de minimis exception you must have an applicable financial statement (AFS), which is defined as follows:
- A financial statement filed with the Securities and Exchange Commission;
- A certified audited financial statement;
- A financial statement required to be provided to the federal or state government or agency (other than the SEC or IRS)
You must also have, as of the beginning of the tax year, written accounting procedures outlining your capitalization policy for non-tax purposes. Specifically, your procedures should note that you treat as an expense:
- Amounts paid for property costing less than a specified dollar amount, or
- Amounts paid for property with an economic useful life of 12 months or less.
If, for non-tax purposes your capitalization policy is in excess of $5,000, only property that does not exceed $5,000 per invoice (or per item, if substantiated on the invoice) will qualify for the de minimis exception.
For taxpayers that do not have applicable financial statements, the de minimis exception is reduced to $500.
Illustration: Z is a corporation that has an AFS. Z has a written accounting policy at the beginning of the tax year to expense amounts paid for property costing $5,000 or less. Z buys 1,000 computers at $600 each, for a total cost of $600,000. Z treats the amounts paid for the computers as an expense on its AFS.
The amount paid for the computers meets the requirements for the de minimis safe harbor. Z may elect to apply the de minimis safe harbor and for tax purposes expense the $600,000 in the year paid.
Assume that Z does not have an AFS, and rather has a reviewed financial statement. In this case, the purchase of the computers does not qualify for the de minimis safe harbor as the item amount of the computers is greater than $500. Z would have to capitalize the computers for tax purposes.
Action needed: In order to take advantage of this de minimis exception you must have your fixed asset capitalization policies written by the beginning of the tax year. Thus, for tax years ending December 31, 2014, you must have your procedures written by January 1, 2014.
Time is ticking; do not hesitate to document those policies before the end of the year. Please contact your tax advisor or Clark Nuber for assistance.
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