Written Capitalization Policy Statement Required by December 31, 2013!

The Federal government recently published final regulations concerning the acquisition, production, and improvement of tangible property.  The regulations are effective for tax years beginning on or after January 1, 2014.  These regulations have been in the works for about 10 years and will change how businesses have historically accounted for repairs, maintenance, and asset purchases.  One of the provisions requires prompt action by all businesses.  This blog post is limited to this provision.  Future posts will cover other aspects of the final regulations.

The regulations provide for an annual "de minimis" safe harbor election for expensing the cost of tangible property equal to or less than a certain threshold amount.  The threshold amount is $5,000 for businesses that file financial statements with the SEC or with a state or local government, or that have a certified audited financial statement (reviewed or complied statements don't qualify).  These financial statements are termed, "applicable financial statements." The threshold is only $500 for businesses without applicable financial statements.  The safe harbor expensing election also applies to tangible property having an economic useful life of 12 months or less.  Note that this de minimis safe harbor election is different from, and is in addition to, bonus depreciation, and expensing under Section 179.

The safe harbor election requires that the business have a written capitalization policy for their financial accounting records BEFORE the start of the tax year for which the expensing will be taken.  Be sure that you have a written policy in place by December 31, 2013 if your tax year starts January 1, 2014.  Without a timely written policy, you can't elect the safe harbor, and asset purchases you choose to expense will be subject to challenge by the IRS, even if under the threshold amount.  The capitalization policy should refer to the dollar threshold amount, and also state whether property having an economic useful life of 12 months or less is also required to be expensed.

In brief, the requirements of the safe harbor election are as follows:

• A written capitalization policy statement is in place before the start of the tax year,
• The purchased items are actually expensed in the financial statements,
• The invoice total, or the cost of each asset purchased as itemized on the invoice, is equal to or less than $5,000 or $500 as applicable, and
• An election statement is made on a timely filed, original income tax return for each tax year.

The expensing ceiling is an all or nothing approach.  For example, if an item cost $5,001 (or $501 if no applicable financial statement), none of its cost can be expensed.