De minimis expensing of tangible property purchases
Posted On: 11-13-2013 | Posted By: WK Staff
This is a common question we hear from business owners, whether it is about computers, machinery, tools, or any other tangible property. In the past, many taxpayers have used internal “thresholds” to determine whether they would capitalize fixed assets and depreciate them or simply deduct them in the year of purchase. This “threshold” method was never officially approved by the IRS.
However, with the new tangible property regulations released this fall, we now have “safe harbor” amounts approved by the IRS that can be used to determine whether purchases of tangible property should be capitalized or expensed. The various thresholds and what you need to do to be able to use them are discussed below.
Materials and supplies. The new regulations allow an immediate deduction for materials and supplies costing less than $200 to acquire or produce. No yearly elections or actions are needed on your part in order to qualify for this safe harbor amount – simply expense those purchases. However, a one-time change of accounting method form should be filed for the tax year in which you want to first adopt this method. Please contact your tax advisor to do so.
De Minimis threshold for other tangible personal property. For tangible personal property (other than materials and supplies), businesses now have the IRS’s blessing to establish internal thresholds. The amount of the threshold depends on whether a business has an “applicable financial statement.”
No “applicable financial statement.” The business may make a yearly election to expense the majority of your tangible property purchases costing $500 or less per invoice (or per item as shown on the invoice).
“Applicable financial statement” is prepared. If your financial statements are audited (or are filed with the federal or state government or any federal or state agency), then you can make a yearly election to expense the majority of your tangible property purchases costing $5,000 or less per invoice (or per item as shown on the invoice). Filing a tax return with financial information does not count as “filing” a financial statement with the federal or state government.
You must meet all of the following requirements in order to use either the $5,000 or $500 thresholds:
- have a written accounting policy in place at the beginning of your taxable year stating you will treat all property purchases under a specified dollar amount ($500 or $5,000 maximum) as current year expenses;
- expense these items on your financial statements as well as your tax return; and
- file an annual election with your tax return. Let your tax advisor know your accounting policy, and he or she can assist you in filing the election.
- In addition, a one-time change of accounting method form may need to be filed for the tax year in which you want to adopt this method. Please contact your tax advisor for assistance in filing the form.
Be aware there are some exceptions to these safe harbor amounts.
- You are not allowed to improperly split the cost of an item between multiple invoices simply to arrive under the dollar threshold on each invoice.
- If costs to acquire the property are included on a separate invoice, they are not required to be included when comparing the property cost with the threshold. If they are included, they must be included in the total item cost when comparing to the threshold amount.
The de minimis rules do not necessarily apply to the acquisition of property expected to be used in the production of other property (i.e. inventory) if you are subject to IRS code section 263A. For example, the purchase of a part to be installed in manufacturing equipment, even those under the threshold, may not qualify. Please contact your tax advisor to find out if this applies to you. Keep in mind that written accounting procedures must be in place at the beginning of your taxable year, so if you use the calendar year, you have until December 31, 2013, to put these procedures into place for the 2014 tax year. For your convenience we’re providing an example of a written accounting policy.
Please contact your WK tax advisor at (573) 442-6171 or (573) 635-6196 to discuss how these rules apply to you.
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