The IRS has recently issued final “repair” regulations that are intended to provide more certainty to the treatment of costs to acquire, produce or improve tangible property. These otherwise extensive rules also provide taxpayers with a “de minimis safe harbor”, or “safe harbor” for short. The safe harbor may be best described as a taxpayer-friendly framework for distinguishing capital expenditures from deductible business expenses when accounting and reporting for tangible property.
The new safe harbor specifies that taxpayers with audited financial statements may expense individual items costing $5,000 or less. Taxpayers without audited financial statements may expense individual items costing $500 or less. Furthermore, taxpayers must use the same capitalization policy for accounting and tax purposes.
The safe harbor also applies to a financial accounting procedure that allows a current deduction of amounts paid for property with an economic useful life of 12 months or less, as long as the amount per invoice (or item) does not exceed $5,000/$500 for audited and non-audited financial statements, respectively.
For the safe harbor to be effective for tax purposes, it must (1) conform with all amounts expensed in accordance with the taxpayer’s written capitalization policy for financial statement purposes, including materials and supplies, (2) the policy must be in writing as of January 1, 2014 and (3) the safe harbor provisions must be elected annually by including a statement on the taxpayer’s timely filed original federal tax return for the year elected.
The safe harbor applies only to companies with a written capitalization policy. The rules have a number of specific criteria and applications not necessarily covered here and contain many other provisions that could help maximize your tax savings.
We have attached a sample written capitalization policy. (Sample Safe Harbor Capitalization Policy)
There are a lot of moving parts to these new regulations that may be unique to your business. If you have any questions on this or any other matter, please contact one of our tax professionals for assistance.