To Capitalize or Expense



The Internal Revenue Code has long generally required the capitalization of expenditures to acquire, produce or improve tangible property. This means that instead of “writing off” an amount in the year it is bought, your business must treat it as a depreciable asset and write it off over a period of time, depending on the nature of the asset.

Naturally, the IRS had regulations which attempted to define the difference between these “capital” and “non-capital” expenditures. Equally, there has been argument between those who pay taxes and those who collect them over this issue—even though an asset is usually going to be deductible one way or the other:  all at once or over a period of time, usually the quicker it is deducted the later the business pays tax, and the later it is deducted the sooner the IRS gets to collect tax. And either way, the timing of when the deduction is taken may cost or save tax.

After long study and consideration, issuance of temporary regulations and, rumor has it, actually involving taxpayer feed
back, the IRS has finally issued “final regulations” which are generally in effect for tax years beginning on or after January 1, 2014.

As is the case with all IRS pronouncements of a formal nature, these regulations are not light reading. An example of the type of situation covered is the “De Minimis Safe Harbor” which provides a general rule that transaction costs associated with acquiring or producing a unit of property must be capitalized. The de minimis exception requires taxpayers to use a reasonable, consistent methodology clearly reflecting income for tax purposes, established a new safe harbor determined at the invoice or item level and based on the policies that the taxpayer utilizes for its financial accounting books and records. A taxpayer with an “applicable financial statement” may rely on the de minimis safe harbor of the final regulations only if the amount paid for property does not exceed $5,000 per invoice, or per item as substantiated by the invoice.

We will be studying this complex new pronouncement and planning for its implementation, in order to accomplish the goal which is always in our hearts and minds:  that our clients are well advised and well served.