Filed under: Real Estate, Tax Compliance & Planning

By Amber Busch, CPA

For years the IRS has tried to wrap its arms around rules related to capitalization vs. deductible repairs and supplies for tangible property. In September 2013 the IRS issued the Final Tangible Property Regulations, two years after issuance of the proposed 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. This benefit may be advantageous to exempt organizations that have unrelated businesses that generate unrelated business taxable income (UBTI).

To qualify for the $5,000 de minimis exception you must have an applicable financial statement (AFS), which is defined as follows:

  1. A financial statement filed with the Securities and Exchange Commission;
  2. A certified audited financial statement; or
  3. A financial statement required to be provided to the federal or state government or agency (other than the SEC or IRS)

You also must 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:

  1. Amounts paid for property costing less than a specified dollar amount, or
  2. 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. The IRS also does not require a written accounting policy in these situations, but they do require that you have an accounting policy in place, whether written or unwritten.

Illustration: Z is an organization that has an AFS. Z has an unrelated business that generates UBTI for which it files a Form 990-T. 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 100 computers at $600 each, for a total cost of $60,000. Z treats the amounts paid for the computers as an expense on its AFS.

The amounts paid for the computers meet the requirements for the de minimis safe harbor. Z may elect to apply the de minimis safe harbor and for tax purposes expense the $60,000 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 cost of each computer is greater than $500.

Action needed: In order to take advantage of this de minimis exception you must have your accounting procedures written by the beginning of the tax year. Thus, for tax years ending June 30, 2015, you must have your procedures written by July 1, 2014.

Time is ticking; do not hesitate to document those procedures in writing before the end of the year. Please consult your tax advisor, or contact Karen Dunn, tax senior manager in Clark Nuber’s Not-for-Profit group.

© Clark Nuber PS, 2014.  All Rights Reserved

This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.