Business Tax Deduction Opportunity: Capitalization of Tangible Property Costs

Boulay writes: The IRS recently released final regulations on the capitalization of tangible property costs. The final regulations provide an important opportunity — the de minimis safe harbor election — that allows eligible businesses to immediately expense certain property that would have to be capitalized otherwise. To qualify for the safe harbor, businesses must have nontax accounting procedures in place at the beginning of the year, under which they expense amounts paid for property costing less than a specified dollar amount or that have a useful life of 12 months or less.

The IRS recently released final regulations on the

capitalization of tangible property costs. The final

regulations provide an important opportunity — the

de minimis safe harbor election — that allows eligible

businesses to immediately expense certain property that

would have to be capitalized otherwise. To qualify for the

safe harbor, businesses must have nontax accounting

procedures in place at the beginning of the year, under

which they expense amounts paid for property costing less

than a specified dollar amount or that have a useful life of

12 months or less.

The amount that can be expensed under the safe-

harbor election depends on whether the business has an

Applicable Financial Statement (“AFS”), which includes:

(1) financial statements filed with the SEC or provided to a

federal or state government or agency (other than the SEC

or the IRS); and (2) certified audited financial statements

used for credit purposes, reporting to owners, or other

substantial nontax purposes.

•

Businesses with an AFS must have written accounting

procedures in place at the beginning of the tax year

to make the safe harbor election. If they do, then they

can expense property that costs up to $5,000 (per

item) if, in accordance with their written accounting

procedures, the property is expensed on their AFS.

•

Businesses without an AFS must have accounting

procedures in place at the beginning of the year. If they

do, then they can expense property costing up to $500

(per item) if, in accordance with those procedures, the

property is expensed in their books and records. The

procedures do not need to be written. However, we

strongly recommend that all businesses commit their

accounting procedures to writing.

The regulations do not define accounting procedures or

describe what the procedures should include, but the

IRS is really talking about a capitalization policy. Many

businesses establish a minimum dollar amount that must

be spent before a cost is capitalized. Otherwise, the cost

is deducted. The following is a sample capitalization policy

that can be used or modified to fit a business’s particular

needs: 

It is the business’s policy to capitalize assets that cost

$500 or more individually. All capitalized assets will be

depreciated in accordance with the business’s depreciation

policy. Assets that cost less than $500 individually will be

expensed in the period purchased. 

Note:

To take full advantage of the safe-harbor limit, a

business with an AFS would need to increase the cost

threshold to $5,000. 

Please contact us as soon as possible if you would like to

discuss this tax saving opportunity, since the accounting

procedures (capitalization policy) must be in place by the

beginning of next tax year (by 1/1/14 for calendar-year

businesses) to make the safe harbor election.

Contact Boulay here.