By Ryan Bianco, CPA
The 2014 tax year is the first year the final tangible property regulations, also known as the “Repair Regulations,” are required to be implemented. These expansive regulations affect taxpayers that acquire, produce, and improve tangible property in the course of their business.
The Repair Regulations address whether expenditures on tangible property are currently deductible or must be capitalized and depreciated over time. Generally, taxpayers must capitalize amounts paid to acquire or produce tangible property. However, the de minimis safe harbor election, one of the major provisions of the regulations, allows taxpayers to currently deduct the cost of acquired or produced tangible personal property that does not exceed a specified amount. The amount is dependent on whether or not the taxpayer has an applicable financial statement (AFS), which generally means an audited financial statement. Taxpayers with an AFS may deduct an amount paid that does not exceed $5,000 per item and taxpayers without an AFS may deduct up to $500 per item. The threshold is determined based on a single item of property listed on an invoice. When multiple items of property are purchased on one invoice and additional costs are stated as a single sum, the taxpayer must use a reasonable method to allocate the additional costs among each item of property in computing the per-item cost.
Additionally, the Repair Regulations expand the definition of materials and supplies to include property with a useful life of 12 months or less that has an acquisition or production cost of $200 or less. However, materials and supplies are also covered under the de minimis safe harbor election. Tangible assets not covered under the election include property included in inventory, land, and capitalized rotable parts.
To benefit from the de minimis safe harbor election, a written accounting procedure must be in place at the beginning of the tax year in the form of a written capitalization policy. The policy must specify the dollar amount of the capitalization threshold. The policy in place as of January 1, 2014, will be used as support for the safe harbor election on the 2014 tax return.
If a taxpayer does not currently have a capitalization policy or a taxpayer desires to adjust their current policy to take advantage of a higher deduction amount, the taxpayer must implement a signed and dated policy by January 1, 2015, for the 2015 calendar tax year. The safe harbor election does not prevent taxpayers from maintaining a policy in excess of the threshold amount. However the Internal Revenue Service will only allow a deduction not to exceed the $5,000 or $500 threshold.
Your McClintock & Associates advisor will be able to assist you in determining the impact these provisions will have on your upcoming tax returns and whether you should consider revising your general accounting policies. We also will be able to assist in determining whether an accounting policy change will be beneficial or detrimental from a Department of Education regulatory and composite score standpoint.
Volume 1, Issue 3
Summer 2014