Applying the De Minimis Rule

The IRS issued far-reaching guidance on the rules that govern the capitalization and expensing of tangible property. Several of these changes have been highlighted in previous blogs. These regulations allow certain taxpayers the option to apply a de minimis rule and expense the cost of qualifying purchases rather than capitalize them. This can help companies improve cash flows by reducing their tax burdens.

Under the de minimis rule amounts paid to purchase materials and supplies or to acquire or produce real or personal property do not have to be capitalized. To be eligible, a company is required to:

  • Produce an applicable financial statement (AFS), which may be one that is audited by an independent CPA, filed with the Securities and Exchange Commission, or required by federal or state agencies;
  • Have a written accounting policy in place for the deduction of property costing less than a certain dollar amount; and
  • Treat amounts paid during the year as an expense, as stated in the written accounting policy.

The aggregate of amounts paid and not capitalized under the de minimis rule for the tax year cannot exceed the greater of:

  1. 0.1% of the taxpayer’s gross receipts for the tax year, as determined for federal income tax purposes; or
  2. 2% of the taxpayer’s total depreciation and amortization expense for such year as determined in its AFS.

Although no formal election statement is needed to identify specific purchases expensed under the de minimis rule, taxpayers should keep detailed records of such assets and amounts.

For help with drafting your company’s asset capitalization policy or more information on any of the new depreciation guidelines, check out our previous blogs and contact your Anders advisor.