The IRS has released final regulations governing when taxpayers must capitalize expenditures and when they can deduct expenditures related to the acquisition of tangible property. These regulations are effective for taxable years beginning on or after January 1, 2014. Importantly, the final regulations provide for a de minimis safe harbor election that allows taxpayers to immediately deduct the cost of acquiring certain items of tangible property, provided that specific requirements are satisfied. The election is made annually by attaching a statement to a timely filed income tax return.
Very generally, taxpayers making the safe harbor election can immediately deduct the cost of newly acquired tangible property if the following requirements are satisfied:
- The amount paid for the property does not exceed $500 per invoice (or per item as substantiated by the invoice);
- The taxpayer has at the beginning of the taxable year (e.g. January 1, 2014) written accounting procedures treating as an expense for non-tax purposes –
- Amounts paid for property costing less than a specified dollar amount; or
- Amounts paid for property with an economic useful life of 12 months or less; and
- The taxpayer in fact treats the amount paid for the property as an expense on its books and records in accordance with these accounting procedures.
Note also that certain taxpayers with “applicable financial statements” can deduct the amount paid for property that does not exceed $5,000 per invoice (or per item as substantiated by the invoice). Applicable financial statements include, for example, financial statements required to be filed with the Securities and Exchange Commission and certified audited financial statements that are accompanied by the report of an independent certified public accountant.
If the de minimis safe harbor election is made for the year, then all purchases meeting the requirements for deductibility must be deducted and not capitalized for all accounting purposes (tax and otherwise). The advantage of an immediate deduction is that taxable income is reduced in the year of purchase. On the other hand, the immediate deduction of purchases eliminates future depreciation deductions in years when income may be higher, and has the possibility of creating distortions in a taxpayer’s financial statements for both book accounting and tax purposes.
The foregoing is only a brief overview of the new regulations. The decision to implement accounting procedures and make the safe harbor election is one that should be considered carefully and in consultation with your accountant and legal counsel. We would be happy to work with you and your accountant to analyze the potential benefits the new regulations may provide for your business.