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In September, the IRS released final "repair" regulations governing when taxpayers must capitalize and when they can deduct their expenses for acquiring, maintaining, repairing or replacing tangible property. The final regulations, which are generally effective January 1, 2014, provide an important safe harbor election that allows eligible businesses to immediately expense certain property that would otherwise need to be capitalized.
In order to qualify for the de minimis safe harbor election, businesses with a calendar year-end must have a nontax capitalization policy in place before year-end that provides for the expensing of items 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 or not the company has an applicable financial statement (AFS). An AFS includes financial statements filed with the SEC or any federal or state agency (other than the SEC or the IRS) and other certified audited financial statements used for credit purposes, reporting to owners or other nontax purposes. The AFS requirement is not satisfied if an independent CPA only performs a compilation or review of a company's financial statements.
The safe harbor allows companies with an AFS to expense costs for acquired or produced tangible property, in accordance with its capitalization policy, up to $5,000. If the taxpayer does not have an AFS, they may follow their capitalization policy, with the threshold reduced to $500 per invoice, or per item as substantiated by the invoice.
If a company has a capitalization policy in excess of the de minimis safe harbor (whether they an AFS or not), it may follow its capitalization policy for tax purposes if it can demonstrate that its policy clearly reflects income. However, this is a subjective standard, and a company will bear the burden of supporting its deductions in the event of an exam.
Click here for example capitalization policies for companies with and without an AFS. This is for illustrations purposes only, and does not represent a comprehensive policy which may be more applicable to a specific industry or company.
The election is made by attaching a statement to a timely filed original tax return for tax years in which the deductions are taken. The new rules, including the de minimis safe harbor election, are effective for tax years beginning after December 31, 2013.
For more information about the final regulations or the new de minimis safe harbor election, please contact your delap tax advisor.