New Income Tax Regulations Related to Repairs and Capitalization

Posted on 11.19.13

Repairs and Cap

By Jacob D. Favaro, CPA, CFP®, Tax Senior Manager

The IRS recently issued new repair regulations that take effect January 1, 2014 that are intended to provide guidance on a variety of topics ranging from when you can deduct supply type items to what constitutes a repair and when you can deduct repairs for tax purposes to when must you capitalize the purchase of an asset.  Many businesses will be surprised to see the scope of the new S requirements and how they are affected.

While in most instances, the new regulations generally take effect in 2014, almost every business will need to adopt a capitalization policy before the end of 2013.

Historically, many businesses have adopted an informal policy that any item of equipment or property costing less than a stated dollar amount is deducted immediately rather than capitalized and depreciated. Before these regulations, there has not been a threshold amount set by regulation and the amount varied from business to business based upon judgment of company management.

With the new regulations, you are required to capitalize the cost of acquiring either real or personal property. There is a “de minimis” exception that allows most taxpayers to deduct up to $500 of the cost of an item of property per invoice, or per item where multiple items are invoiced together. This capitalization threshold can be increased to $5,000 if the company has an applicable financial statement and follows the same policy for financial accounting purposes. Since the vast majority of businesses do not have audited financial statements, the $500 capitalization amount will apply to those businesses. The annual aggregate amount of deductions eligible for the “de minimis” rule is capped at the greater of :

  1. .01% of gross receipts as determined for federal income tax purposes; or
  2. 2% of the taxpayer’s total depreciation and amortization expense for the tax year as determined in the applicable financial statement

The new regulations further require that the capitalization threshold be documented in a formal policy in order to take advantage of the safe harbor.

And the policy needs to be in effect on the first day of the tax year.

Below, you will find a sample capitalization policy statement that you can adopt and include in your corporate tax files. It is recommended that you tailor the document by entering your company name and the capitalization amount you wish to use (up to $500), sign and date the policy. There is no need to file the document with the IRS, however you will need to attach an election to your tax return each year to disclose that you have elected to expense items costing less than your adopted threshold amount under Reg. Section 1.263(a)-1(f).

Please call your Keiter representative or our office to learn other ways these new regulations may impact your business related to Units of Property, Improvements, and Safe Harbor Provisions.

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Capitalization Policy Example

Company X hereby adopts a capitalization policy in which only those items exceeding $xxxx (enter an amount up to $500 or up to $5,000, depending on if your company has audited financial statements) per invoice or per item will be capitalized. All items with a cost below $500 (or $5,000) will be expensed. This policy will be followed for both the books and records and tax return purposes.

Adopted on : January 1, XXXX By: Officer Name