Capitalization Policy Required by December 31, 2013

Whether items purchased for use in a business must be capitalized and depreciated over a period of years or can be expensed in the current year has long been a source of controversy between taxpayers and the IRS. Recent IRS guidance was issued in an effort to clarify this area. The guidance discusses whether taxpayer expenditures related to the purchase of assets, materials and supplies, improvements, betterments, restorations, adaptations, and/or repairs and maintenance should be:

  1. Capitalized on your depreciation schedule,
  2. Deferred (inventoried and tracked) until the item is placed in service, or
  3. Written off when the expenditure is made.

De Minimis Safe Harbor

The IRS established new administrative procedures that provide a "de minimis safe harbor" rule for deducting expenditures costing less than:

  • $5,000 for taxpayer with an audited financial statement, or
  • $500 for all other taxpayers.
To use the de minimis safe harbor, your business must adopt an accounting procedure for treating items at or below a specified dollar amount as an expense for its books and records. For businesses with audited financial statements, the capitalization policy must be in writing. Our suggestion is that your policy be reduced to writing regardless of whether your business has audited (or any) outside financial statements.

You must adopt, communicate, and document your capitalization policy before the beginning of your 2014 tax year. Your capitalization policy is not required to use the safe harbor expensing levels described above – it can use higher or lower limits as can be justified in your circumstances. A sample capitalization policy that meets the requirements is provided for reference.

If you have questions or need assistance in adopting your capitalization policy, please give us a call.