By Alvin Wolcott, CPA
Over the years the IRS regularly battles taxpayers about the treatment of deductible expenses versus items which they believe should have been depreciated.  The courts have weighed in on this topic countless times with varying results.

The good news, the IRS has now provided a safe harbor deduction amount to help businesses limit the number of small items that need to be capitalized and depreciated. As with many recent IRS initiatives, taxpayers must be proactive to use the new rule.

You will need a written policy if your business plans to expense items under $500.  Otherwise, if the IRS comes knocking (and they seem to be increasing their inspections) you will have to be prepared to defend each item that comes under scrutiny.

Starting with 2014, an election can be filed with your tax return to deduct $200, $500 or $5,000 depending on the following business circumstances.

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)

As a planning point, businesses should prepare a written capitalization policy now to qualify for a higher amount in the event it becomes available.


Footnotes:

1.)    Repairs & Maintenance: expenses incurred for the purpose of keeping property in an ordinarily efficient operating condition over its probable useful life.
2.)    Capital Expenditures: replacements, alterations, improvements or additions that appreciably prolong the life of the property.
3.)    Applicable Financial Statements:

a.       Required by SEC
b.      Audited financial statements , or
c.      A financial statement (not a tax return) required to be provided by a governmental agency.