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The IRS Attempts to “Capitalize”

Doug-Cahoy-headshotDuring 2013 the IRS finalized new regulations that govern the decision regarding whether a cost may be expensed in the current tax year or must be capitalized and the depreciation rules then applied.  The overall concepts have not changed drastically but there are significantly more details in the new regulations stipulating how to arrive at that decision.

Under these new regulations all costs that “facilitate” the acquisition or production of real or personal property must be capitalized, though there are exceptions for employee compensation and company overhead costs.  Costs related to investigating an acquisition of real estate do not have to be capitalized unless the expenses are “inherently facilitative.”  Unless a unit of property qualifies as a material or supply or qualifies under a de minimis safe harbor election the invoice price plus applicable transaction costs must be capitalized.

There will be additional information in our year-end letter to businesses.  However, there are a couple of things that need to be in place immediately at the beginning of 2014.  I’ll mention those two items in this article.

  • To take advantage of the “de minimis” rule a company is required to have a written capitalization policy.There is a sample policy at the end of this article.  This policy must also be followed for all financial reporting to banks and other third party users if it is to be allowed for tax purposes.
  • Items that are expensed under the de minimis rule cannot be accounted for as supplies, materials or repairs and they also cannot be accounted for in the fixed asset accounts. Therefore a new account must be set up.  I would suggest a title similar to “De minimis Property Acquisitions.”  The account would be classified as an expense rather than an asset.

Please watch for the year-end business letter from our office which will contain more details on these important changes.

SAMPLE

[Company Letterhead]

Capitalization Policies for the Acquisition, Management, Repair and Maintenance of Company-Owned Tangible Property

Purpose – These guidelines shall be observed by management and staff of the company, who are directly concerned with the accounting and management of company-owned tangible property, in relation to all transactions related to the acquisition, maintenance, sale or other final disposition of such property.

The guidelines set forth in this document shall be known as the company’s capitalization policies and serve as the company’s compliance with the Internal Revenue Code and the tangible property regulations promulgated thereunder. The guidelines are intended to be used for the company’s financial accounting purposes.

Tangible Property – Refers to all tangible personal and real property acquired or produced by the company such as implements, tools, materials, supplies, equipment, furniture, land, buildings, and fixtures for its place(s) of business for the purpose of carrying out all aspects of business operations.

Tangible Property Not Subject to Capitalization:

De minimis Amounts – Amounts paid to acquire or produce tangible property not exceeding $500** are to be charged to the appropriate de minimis property expense accounts.  All tangible property expenditures with an acquisition or production cost under the stated threshold are to be charged to the expense accounts. This policy does not apply to land and property intended to be included in inventory.

Effective Date – January 1, 2014

Date Adopted – [Must be on or before January 1, 2014]

Signature ____________________________________  Title ___________________________________

 

**Use a maximum of $5,000 here in lieu of $500 if your company has an annual independent CPA audit of your financial statements.

Doug Cahoy

Doug Cahoy

CPA, QuickBooks ProAdvisor at Ketel Thorstenson, LLP
Doug Cahoy joined Ketel Thorstenson, LLP in August of 2002. With 28+ years of experience as a CPA, he has spent many hours in the income taxation and small business auditing areas. Mr. Cahoy has significant experience in the construction, real estate, and non-profit industries, as well as personal and business taxation. He currently serves as tax manager and a Certified QuickBooks Pro-Advisor for the firm’s Spearfish office.
Doug Cahoy

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