What Businesses Need to Know about the New Capitalization Regulations

Published:

Jim Wagonerby Jim Wagoner, CPA | Partner, Director of Tax Services

Recently, the IRS and U.S. Treasury issued final tangible property “capitalization” regulations. These regulations have been in the works since 2006. Under specified circumstances, these regulations permit business taxpayers to make safe harbor elections that would enable them to deduct expenditures that might otherwise need to be capitalized.

This article focuses on the de minimis safe harbor election and the requirement for business taxpayers to have a written accounting policy in place no later than the first day of their tax year – January 1, 2014 for calendar year clients.

The amount considered de minimis under the de minimis safe harbor election depends upon whether the taxpayer has written accounting procedures (“accounting policies”) in place and, if so, whether the taxpayer has an applicable financial statement. As long as business taxpayers have written accounting policies in place at the beginning of the tax year (i.e., January 1, 2014), the de minimis amount may be as high as $5,000 for those with an applicable financial statement and as high as $500 for those without an applicable financial statement. Those taxpayers without written accounting policies in place will still be permitted to characterize tangible property as materials or supplies for items costing $200 or less.

Attributes Impacting Capitalization

De Minimis Capitalization Threshold
  • Business has applicable financial statements and appropriate written capitalization policy as of beginning of the tax year.

$5,000
  • Business does not have applicable financial statement but has appropriate written capitalization policy as of beginning of the tax year.

$500
  • Business has neither an applicable financial statement nor appropriate written capitalization policy as of the beginning of the tax year. Generally, tangible property may be characterized as materials or supplies if the item does not exceed the threshold amount.

$200

(formerly $100)

Applicable financial statements are “audited”financial statements used for credit purposes, used to report to shareholders, partners or similar persons, or financial statements (not a tax return) required to be provided to the federal or state government or any federal or state agency.

We interpret the regulations to conclude that “reviewed”, “compiled” or taxpayer-prepared financial statements would only be considered applicable financial statements if required to be provided to government entities.

The annual de minimis safe harbor election is made by attaching a statement to a timely filed original Federal Tax return (including extension). Greenwalt can assist with the appropriate wording when filing the business tax returns.

The new regulations are effective for years beginning after December 31, 2013, but taxpayers may choose to apply to tax years beginning before January 1, 2014, but after December 31, 2011.

What does this mean to business taxpayers? Greenwalt CPAs advise business clients to have a written accounting policy in place at the beginning of their tax year and make the election on a timely filed original return. Otherwise, failure to timely establish these written accounting policies may result in having to capitalize amounts that might otherwise have been expensed.

Although the final regulations provide some clarity, transitioning to these new rules might prove challenging. Please let your advisor at Greenwalt CPAs know if you would like to discuss these regulations or take steps to obtain benefits available from these regulations.

Contact Information:
Jim Wagoner, CPA | Partner, Director of Tax Services | 317.260.4428 | jwagoner@greenwaltcpas.com