Released in September, the new tangible asset regulations added a de minimis safe harbor rule. To take advantage of this change, now is the time to review your written asset capitalization policies to make sure that they coincide with the new regulations.
Who is impacted by this new regulation?
All taxpayers with fixed assets on their books, whether it’s a S Corporation, Partnership, C Corporation or Schedule C, will need to look at the accounting procedures they have in place.
How have the regulations changed the rules?
In the past taxpayers could deduct certain amounts paid for tangible property if the taxpayer had an applicable financial statement (AFS), had written account policies for expensing amounts under specific dollar amounts, and treated those amounts as expenses on its AFS. The ceiling was the greater of .1% of the taxpayer’s gross receipts for the tax year or 2% of the taxpayer’s total depreciation and amortization expense for the tax year.
The new regulations have eliminated that ceiling. The new de minimis safe harbor is now determined at the invoice item level, but the policy must be the same for book purposes. If the taxpayer has an AFS, the taxpayer may rely on de minimis safe harbor only if the amount paid for property does not exceed $5,000 per item on each invoice. The de minimis safe harbor has been expanded to include amounts paid for property having an economic useful life of less than 12 months, provided the amount per invoice items does not exceed $5,000. So as long as you have an AFS and a capitalization policy in place, you can expense all items purchased that are under $5,000 if that is your capitalization policy.
There is also a de minimis safe harbor for taxpayers that do not have an AFS. If a taxpayer does not have an AFS, but still has a capitalization policy in place, the de minimis safe harbor is $500 per item. If cost exceeds $500 per invoice, no portion will qualify for the safe harbor.
Some other things to know about the de minimis rule include the following:
- The de minimis safe harbor is elected annually by including a statement on the taxpayer’s tax return for the year elected.
- A taxpayer electing the de minimis rule must include in the cost of the property all additional costs (i.e., delivery fees, installation services, or similar costs) of acquiring or producing the property if these costs are included on the same invoice as the tangible property. If the additional costs are not included on the same invoice, then they do not need to be included.
What are my next steps?
Now that you have a background on the de minimis rule, the one step that we need to take before the end of the year is to review your capitalization policy. If you already have one in place, let’s review it together to ensure it is up to date. If you don’t have one yet, let’s talk about getting one in place. The capitalization policy must be in place before January 1, 2014, so be sure to contact your RKL advisor to discuss.
Contributed by Kyle L. Weller, CPA, a supervisor in RKL’s Tax Services Group. Kyle is responsible for tax planning and compliance for corporations, partnerships and individual clients.