2014 Depreciation and Capitalization Policies

February 9, 2014

Business owners and company management have been challenged for as long as I have been practicing with questions related to what can be treated as a repair expense vs. what should be classified as a fixed asset and depreciated over its useful life. At long last, the IRS has issued guidance to assist in developing these policies and providing a De Minimis Safe Harbor Election to support your chosen position, BUT it does require you to formalize your policy! Adopting an appropriate capitalization policy will provide clarity to your choices to expense or capitalize certain expenditures and provide a level of safe harbor to support those decisions for tax reporting purposes.

The safe harbor allowances and requirements are split into two categories – taxpayers with applicable financial statements (AFS) and taxpayers without applicable financial statements (AFS). The key differentiator is the AFS. AFS is defined as certified audited financial statements, SEC or regulatory filing. As such, many privately-held businesses will fall into the second classification unless they have their annual financial statements audited. Our discussion will focus on the second group without AFS.

The following requirements apply to this group of businesses:

  1. Accounting procedures (based on a specified amount or useful life of 12 months or less) should be in place at the beginning of the year.
  2. Must expense on books according to the accounting procedure.
  3. Amount paid must be $500 or less per invoice (or per item as substantiated by the invoice)
  4. Additional costs (e.g. delivery or installation) are included in determining cost only if included on the same invoice as the item in question
  5. Lump-sum fee allocable to multiple invoices
  6. File annual election statement with timely filed original return including extensions
  7. Anti-abuse rule (e.g. improper splitting of costs to multiple invoices prohibited)
  8. Applied to tangible property only; intangibles are not eligible (e.g. computer software)
  9. Does not apply to land, inventory or certain rotable, temporary or emergency spare parts that the taxpayer has elected to capitalize or use the optional method
  10. If elected, must apply to all items that qualify

The guidance from the IRS provides a number of definitions and further details on a number of related issues, but the first step in ensuring that your business has a Capitalization Policy in place and that you adhere to it in order to comply with the tangible property regulations.

As always, we welcome the opportunity to discuss any questions or concerns you have regarding this information or to provide assistance in the application of this guidance to your specific situation.

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