Repair Regulations Require a Capitalization Policy To Be In Place

There are many optional elections with the repair regulations as mentioned in our previous blog that can be made by taxpayers, most for the taxable year beginning January 1, 2014. One of the most important elections to understand is the de minimis safe harbor election and this election requires procedures to be in place by December 31, 2013 for calendar year taxpayers.  Pursuant to the final repair regulations, a de minimis safe harbor provides for expensing units of property costing less than a specified dollar amount or expensing units of property that have a useful life of not more than 12 months. In order to utilize the election, the taxpayer must have a capitalization policy in place at the beginning of the tax year. In addition, the policy must be followed for both book and tax purposes.

Under the de minimis safe harbor, a taxpayer may elect to deduct amounts paid for property up to $ 5,000 per invoice or item if the taxpayer:

  1. Has an applicable financial statement (AFS);
  2. Has a written capitalization policy for expensing amounts paid for property either costing less than a certain dollar amount or with an economic useful life of 12 months or less in place at the beginning of the year, and;
  3. Treat such amounts as an expense on its AFS according to the written capitalization policy in place

An AFS is defined as follows:

  1. A financial statement required to be filed with the Securities and Exchange Commission (SEC) (the 10-K or the Annual Statement to Shareholders);
  2. A certified audited financial statement that is accompanied by the report of an independent certified public accountant ( or in the case of a foreign entity, by the report of a similarly qualified independent professional) that is used for:
    1. Credit Purposes
    2. Reporting to shareholders, partners or similar persons; or
    3. Any other substantial non-tax purpose; or
  3. A financial statement (other than a tax return) required to be provided to the federal or a state government or any federal or state agency (other than the SEC or the IRS).

The de minimis safe harbor also establishes a safe harbor for those taxpayers without an AFS.  For those taxpayers without an AFS, the taxpayer may elect to deduct amounts paid for property up to $500 per invoice or item if the taxpayer”

  1. Has a capitalization policy for expensing amounts paid for property either costing less than a certain dollar amount or with an economic useful life of 12 months or less in place at the beginning of the year, and;
  2. Treat such amounts as an expense on its books and records according to the  capitalization policy in place

The de minimis safe harbor is not eligible for the following property:

  1. Property that is inventory or is intended to be included in inventory
  2. Land
  3. Rotable, temporary, and standby emergency spare parts that are capitalized and depreciation under Reg 1.162-3(d)
  4. Rotable and temporary spare parts that are accounted for under the optional method of accounting for rotable parts under Reg 1.162-3(e)

The taxpayer electing to use the de minimis safe harbor must include the additional costs of acquiring property (e.g., delivery fees, installation costs, etc.) that are included on the same invoice as the property.  However, a taxpayer does not have to include additional costs of acquiring or producing the property if such costs are not included on the same invoice.

The de minimis safe harbor is one of the most important elections for taxpayers to understand and decide whether to utilize on their timely filed tax return. Since the capitalization policy must be in place at the beginning of the tax year, a taxpayer must act quickly before Jan 1, 2014. Your Anders advisor is always here to help you get a policy in place.