In September 2013, the IRS issued final regulations on the deduction and capitalization of expenditures related to tangible property (the “repair regulations”). The final IRS regulations make significant taxpayer-friendly changes. Compliance with these rules will impact nearly every business and are effective for tax years beginning on or after January 1, 2014.
The final regulations cover five significant areas:
- Materials and supplies;
- Repairs and maintenance;
- Capital expenditures;
- Amounts paid for the acquisition or production of tangible property; and,
- Amounts paid for the improvements of tangible property.
This article will focus only on capital expenditures and what action must be taken by December 31, 2013.
The regulations include a safe harbor provision to expense purchases of tangible property that does not exceed a certain dollar limitation (the de minimis safe harbor). The dollar amount will depend on whether your business has an applicable financial statement (“AFS”). An AFS is a financial statement required to be filed with the Securities and Exchange Commission or a certified audited financial statement that is accompanied by the report of an independent Certified Public Accountant. If a taxpayer’s financial results are reported on the applicable financial statement for a consolidated group of entities, then the group’s applicable financial statement may be treated as that of the taxpayer.
The final regulations allow a taxpayer with an AFS to expense qualifying purchases of tangible property up to $5,000 (the de minimis safe harbor). The taxpayer must use this policy for both financial accounting and tax. The safe harbor is applied at the individual item level. For example, if a company purchases 100 computers at $3,000 each (total invoice price of $300,000), the company may immediately deduct for both book and tax. The company needs to have a documented capitalization policy in place by December 31, 2013. A sample policy can be found here.
Taxpayers without an AFS (i.e., reviewed or compiled financial statements) may use the safe harbor, however, the amount is reduced to $500 per item.
Taxpayers need to consider the following items in adapting its capitalization policy for 2014:
- Expiration of tax attributes such as credits and net operating losses
- Availability of Section 179 (allowing for the immediate expense of tangible property of up to $25,000 for 2014 tax year), including limitation on Section 179 for state income taxes
- Earnings per share for public companies
- Impact on debt covenants
- Computation of employee or executive bonuses based on EBITDA
- Reevaluate level of attest services (changing to audited financial statement versus a review or compilation)
- Other non-tax considerations
For more information on the new IRS rules and what your business must do by December 31, please contact:
Jim Forbes (Cleveland) 440-605-7156
Chris Sivak (Akron) 330-576-1832
Mike Milazzo (Tampa) 813-261-4719
These new rules will impact virtually all taxpayers and careful consideration and planning need to be done by December 31, 2013 to adopt the most advantageous policy for 2014.