New IRS rules for capitalization and depreciation
In September of this year, the IRS 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 otherwise have to be capitalized. 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.
Safe Harbor amounts depend upon whether you have an audited financial statement - $5,000 per item, or no audited financial statement - $500 per item
The amount that can be expensed under the safe-harbor election depends on whether the business has an audited financial statement (Applicable Financial Statement (AFS)) or not.
- Businesses with an AFS must have written accounting procedures in place to make the safe harbor election. If so, 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 so, 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 apparently do not need to be written. However, we strongly recommend that all businesses commit their accounting procedures to writing.
Additional safe harbor for amounts paid for items that have a useful life of 12 months or less
There is an additional safe harbor that allows for current deductions for items that have an economic useful life of 12 months or less. However, even under this safe harbor the cost amount needs to be below the stated thresholds of $500 or $5,000 for businesses that have audited financial statements.
Sample capitalization policies
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 audited financial statement would need to increase the cost threshold to $5,000.
Here is a sample capitalization policy for items with an economic useful life less than 12 months:
It is the business’s policy that amounts paid to acquire or produce tangible property having an economic useful life (as defined in §1.162-3(c)(4)) of 12 months or less are to be charged to the appropriate de minimis property expense accounts and expensed in the year acquired.
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.
For additional information or questions please contact the author Barry D. Groebel at [email protected] or 610-378-1175.
Barry D. Groebel, CPA