Hopefully your tax professional made you aware before the end of the 2013 tax year that it was an opportune time to discuss tax preparation and tax planning strategies as to when taxpayers must capitalize costs and when they can deduct expenses for acquiring, maintaining, repairing, and replacing tangible property.
Final Repair/Capitalization Regulations
The new rules apply to tax years beginning on or after January 1, 2014, but provide taxpayers with the option to apply either the final or temporary regulations to tax years beginning after 2011 and before 2014.
De minimis expensing alternative. The final regulations also include a new de minimis expensing rule that allows taxpayers to deduct certain amounts paid or incurred to acquire or produce a unit of tangible property. To take advantage of this $5,000 de minimis rule, however, taxpayers must have written book policies in place at the start of the tax year that specify a per-item or invoice-threshold dollar amount (up to $5,000) that will be expensed for (audited) financial accounting purposes. Calendar-year taxpayers, therefore, should have a policy in place by year-end 2013 to qualify for 2014.
For smaller businesses, the final regulations added a safe harbor for taxpayers without an applicable audited financial statement. The per-item or invoice-threshold amount in that case is $500. However, if the taxpayer fails to timely file its 2013 return and make the election for the $500 threshold, the most that the taxpayer can elect is $250. This is a good example why all tax returns should be timely filed. It would also be a good idea for the business to formally adopt this accounting policy.
Materials and Supplies
The cost of non-incidental materials and supplies are generally deducted in the tax year first used or consumed. The final and temporary regulations define “materials and supplies” to mean tangible property used or consumed in the taxpayer’s business operations that is not inventory and that:
- is a component that is acquired to maintain, repair, or improve a unit of tangible property owned, leased, or serviced by the taxpayer, but is not acquired as part of any single unit of tangible property; or
- consists of fuel, lubricants, water, and similar items that are reasonably expected to be consumed in 12 months or less, beginning when used in a taxpayer’s operations; or
- is a unit of property that has an economic useful life of 12 months or less, beginning when the property is used or consumed in the taxpayer’s operations; or
- is a unit of property with an acquisition or production cost (as determined under the UNICAP rules) of $200 or less (the threshold is $100 or less under the temporary regulations); or
- is identified by the IRS in published guidance.
Planning Idea: The IRS expanded the definition of materials and supplies that may be expensed to include property with an acquisition or production cost of up to $200. The IRS reasoned that this higher threshold amount will “capture many common supplies such as calculators and coffee makers.”
Note: Because everyone’s tax situation is different, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation.
You can also schedule a consultation at Click Here. To learn more about various tax and business services, visit Tax Preparation Services and Small Business Accounting Services
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