On September 13, 2013, Treasury released final regulations regarding tangible property expenditures. The final regulations address the proper tax treatment of maintenance, repair, and property improvement activities. Additionally, the regulations provide safe-harbors for expensing property acquired that is below per item or invoice cost amounts which should be helpful for taxpayers in terms of being able to expense the cost of the item. The final regulations attempt to bring certainty to a complicated area of tax law. The regulations are very complex – this article attempts to only summarize threshold material and supply expensing bright lines and also the beneficial De Minimis safe harbor for businesses to be able to expense purchased tangible property.
Materials & Supplies Expensing
Incidental materials and supplies may be expensed when purchased generally when the items acquired have a useful life of 12 months or less. This has been the status of the law for some time and there is always the potential for disagreement on expected useful life. I recall an argument one of my former supervisors had with an IRS agent about the useful life of a pen. The final regulations provide a bright-line expensing rule for the acquisition of materials or supplies that cost $200 or less. The proposed regulations had a $100 cost threshold so the increase to $200 is favorable for taxpayers.
De Minimis Safe Harbor Expensing – Company Policy & Election Required
Many business owners prefer to use the same capitalization methods for book and tax purposes when they acquire nominal cost tangible property. The final regulations permit certain taxpayers to deduct tangible property they acquire or produce, if the total cost per item (or invoice) is $5,000 or less. To qualify for this safe harbor, you must:
- Prepare an “applicable financial statement”. That is, generally, a certified audited financial statement
- Possess a written accounting policy at the beginning of the tax year for expensing property acquired or produced that is under a specified dollar amount
- Expense the cost on your financial statement as well as on your tax return
- Make the annual election to expense items pursuant to the De Minimis safe harbor in the related timely-filed tax return.
Note that the De Minimis test can be applied to items stated on an invoice even if the total invoice exceeds the $5,000 amount. For example, if a taxpayer with audited financial statements purchases ten computers that are itemized at $5,000 each, the total invoice cost of $50,000 would be expensed for both financial statement and tax purposes so long as the other requirements are satisfied.
Many private businesses do not prepare audited financial statements. You might prepare financial statements in-house or have them compiled or reviewed by DS&B, Ltd., for example. Taxpayers without audited financial statements are subject to a $500 cost per invoice or item threshold. Even to qualify for the lesser amount, you must have accounting policies in place at the beginning of the tax year for expensing property at or below the threshold and make the De Minimis safe harbor election in the related timely filed tax return.
If you do not currently have a written policy for expensing property under a specified dollar amount, you should consider adopting one before December 31, 2013 if you plan to elect the De Minimis safe harbor expensing rule for 2014 tax filings.
About the Author
Paul Simons, CPA | Principal
With nearly 30 years experience in public accounting and business consulting, Paul’s practice concentration includes leading the DS&B team on tax compliance, tax planning and tax authority dispute resolution. View More
IRS Circular 230 – Notice of Disclosure: Any tax advice included in this electronic or written communication is not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.