Tax Tips & Traps for Business Owners
Capitalization vs. expense rules for purchases of tangible personal property.
The IRS released final regulations on the capitalization vs. expense rules for purchases of tangible personal property. How do these rules impact you and your business?
Here are the highlights you need to be aware of:
Businesses need to have a written accounting policy in place on the first day of the tax year beginning January 1, 2014 or be required to capitalize, rather than expense, costs for tangible property, material and supplies costing more than $200.
A business owner is generally required to capitalize, rather than deduct, amounts paid to purchase or produce a unit of real or personal property. However, a business owner is allowed to deduct, rather than capitalize, the costs of certain supplies, repairs, and routine maintenance. It has often been challenging and confusing for business owners to figure out which cost must be capitalized and which may be currently expensed. The IRS clarified this in these regulations.
De Minimis Safe Harbor Election
These IRS regulations provide an annual election that will allow you to currently expense the cost, rather than capitalize, costs paid for tangible personal property that does not exceed a specific dollar amount. For businesses that have "applicable financial statements" (SEC, audited or Gov't required financial statements) the de minimis threshold dollar amount is $5,000, all other businesses cannot exceed a $500 threshold. This safe harbor is generally applied to all tangible property, including materials and supplies(doesn't apply to inventory).
Many businesses will need to file a form 3115, Application for Change in Accounting Method, during the 2014 tax year filing in order to comply with these regulations.
If you would like to discuss how these rules apply to you, please contact me. I have included a sample below. If you have "AFS" you can use $5,000 instead of $500.
Sample Capitalization Policy for entity without "AFS"
Here are the highlights you need to be aware of:
Businesses need to have a written accounting policy in place on the first day of the tax year beginning January 1, 2014 or be required to capitalize, rather than expense, costs for tangible property, material and supplies costing more than $200.
A business owner is generally required to capitalize, rather than deduct, amounts paid to purchase or produce a unit of real or personal property. However, a business owner is allowed to deduct, rather than capitalize, the costs of certain supplies, repairs, and routine maintenance. It has often been challenging and confusing for business owners to figure out which cost must be capitalized and which may be currently expensed. The IRS clarified this in these regulations.
De Minimis Safe Harbor Election
These IRS regulations provide an annual election that will allow you to currently expense the cost, rather than capitalize, costs paid for tangible personal property that does not exceed a specific dollar amount. For businesses that have "applicable financial statements" (SEC, audited or Gov't required financial statements) the de minimis threshold dollar amount is $5,000, all other businesses cannot exceed a $500 threshold. This safe harbor is generally applied to all tangible property, including materials and supplies(doesn't apply to inventory).
Many businesses will need to file a form 3115, Application for Change in Accounting Method, during the 2014 tax year filing in order to comply with these regulations.
If you would like to discuss how these rules apply to you, please contact me. I have included a sample below. If you have "AFS" you can use $5,000 instead of $500.
Sample Capitalization Policy for entity without "AFS"
effective 1-1-14
1. This accounting policy establishes the minimum cost that shall be used to determine the capital assets to be recorded in _______________'s books and financial statements.
business name
2. A capital asset is a unit of property with a useful life of over one year and a purchase price exceeding $500. Capital assets will be depreciated over their useful lives. ______________ will expense the full purchase cost of tangible personal property below this business name threshold of $500 in the year of purchase.
3. All capital assets are recorded at historical cost of the date of purchase.
4. Substantiating invoices, etc. for the purchase of each unit of property will be retained for a minimum of ___________ years.
1. This accounting policy establishes the minimum cost that shall be used to determine the capital assets to be recorded in _______________'s books and financial statements.
business name
2. A capital asset is a unit of property with a useful life of over one year and a purchase price exceeding $500. Capital assets will be depreciated over their useful lives. ______________ will expense the full purchase cost of tangible personal property below this business name threshold of $500 in the year of purchase.
3. All capital assets are recorded at historical cost of the date of purchase.
4. Substantiating invoices, etc. for the purchase of each unit of property will be retained for a minimum of ___________ years.
updated 2/2/15
