DiSabatino CPA Blog

Mike DiSabatino CPA

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Capitalization Rules for Business - ACTION REQUIRED

new-lawHere is a copy of recent communication to my business clients... It may be of interest to your business.

Recently, the Internal Revenue Service issued final tangible property capitalization regulations. These regulations provide clarity to a complex area of tax law for business taxpayers who acquire tangible property, or who own tangible property which they improve, maintain or repair. The final regulations address the proper characterization and tax treatment of expenditures related to these acquisitions, improvement, maintenance and repair activities.       



Generally, under IRC Section 263(a), amounts paid to acquire, produce or improve tangible property must be capitalized. However, taxpayers are permitted to deduct ordinary and necessary business expenses, including the costs of certain supplies, repairs and maintenance under IRC § 162 (a). It is often difficult to distinguish:

  1. Between assets that must be capitalized and property that is a material or supply,
  2. Between improvement costs and repair or maintenance costs.
  3. Expensing amounts paid for property less than a specified amount and/or
  4. Expensing payments for property with an economic life of 12 months or less,
    may rely on the de minimis safe harbor as long as the costs do not
    exceed $500 per item.

The finalized regulations attempt to clarify when such payments may be deducted and when they must be capitalized and subject to depreciation.

De Minimis Safe Harbor Election

A key provision in the final regulations is a revised safe harbor election that permits a deduction for de minimis (i.e. insignificant) amounts paid for tangible property. Under the safe harbor election, a taxpayer may elect to not capitalize - to currently deduct - specified amounts paid in the tax year to acquire or produce tangible property, provided the amounts don't exceed applicable thresholds. The amount of the threshold depends on whether the taxpayer has written accounting procedures in place and, if so, whether the taxpayer has an applicable financial statement (generally financial statements audited by a CPA).

Taxpayers without an Applicable Financial Statement (i.e. audited financials)

A taxpayer lacking an applicable financial statement, but with a written accounting policy in place calling for:

I have included a sample of a written policy. If you like, please print on letterhead, and have signed by December 31, 2013, then retain with your permanent accounting records.

Thank you for your confidence in our firm.

Very truly yours,                                                        

Michael DiSabatino


(Taxpayer letterhead)


1. Purpose

This accounting policy establishes the minimum cost (capitalization amount) that shall be used to determine the capital assets to be recorded in taxpayer's books and financial statements.

2. Capital Asset Definition and Thresholds

A "Capital Asset" is a unit of property with a useful life exceeding one year and a per unit acquisition cost exceeding $500.00. Capital assets will be capitalized and depreciated over their useful lives. Taxpayer will expense the full acquisition cost of tangible personal property below these thresholds in the year purchased.

3. Capitalization Method and Procedure

All Capital Assets are recorded at historical cost as of the date acquired.

Tangible assets costing below the aforementioned threshold amount are recorded as an expense for Taxpayer's annual financial statements (or books). In addition, assets with an economic useful life of 12 months or less must be expensed for both book and financial reporting purposes.

4. Documentation

Invoices substantiating the acquisition cost of each unit of property are to be retained for a minimum of four (4) years.


Print Name                                                                             Date signed (Prior to Jan 1, 2014)



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