The IRS recently issued final regulations providing direction to taxpayers about capitalizing asset purchases and deducting the expenditures. These regulations affect all taxpayers that acquire, produce, or improve tangible personal property and apply to the tax years beginning January 1, 2014. Examples of items that are included in these regulations are office equipment and furniture.
Safe Harbor Rules
The regulations included minimum safe harbor rules allowing for the deduction of expenditures that do not exceed a certain dollar amount. A safe harbor provision provides a taxpayer protection from liability or penalty if certain conditions are met. The safe harbor amount is available if the taxpayer has a written accounting policy stating the dollar amount threshold for expensing in place by the beginning of the tax year. The safe harbor amounts apply to each individual expenditure which does not exceed a specified amount (which must be identified in the written accounting policy). See this link for a sample written book capitalization.
There are two different limitations on the safe harbor amounts. The limitation for a taxpayer with an applicable financial statement is $5,000. The limitation for a taxpayer without an applicable financial statement is $500. An applicable financial statement is:
- A statement filed with Securities and Exchange Commission (SEC),
- A statement audited by an independent CPA that is used for credit purposes, reporting to equity holders or for any substantial non-tax purpose, or
- A statement other than a tax return required to be provided to an agency of the federal or state government (other than the IRS or SEC).