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Written Capitalization Policy Required to Take Advantage of Safe Harbor

December 19, 2013

The IRS released regulations for repairs of tangible property, which offer guidance for businesses on how to account for expenditures related to tangible property. Although the regulations made significant changes, there are steps you can take to minimize the impact. Below is an overview of what changed and what you can do.

What Changed?
These new regulations, which are effective for tax years starting in 2014, change things such as:

  • Whether your expenditures can be deducted as a repair or needs to be capitalized.
  • How to account for materials and supplies.
  • How to handle costs incurred from acquiring, producing, or improving tangible property.

What Do I Need To Know NOW?
There is one safe harbor that needs action before December 31, 2013 – the De Minimis Safe Harbor. Starting in 2014, the invoice for your tangible property purchases takes on new importance. Qualifying items purchased with a value $5,000 or less, if you have an audited financial statement and a written accounting policy in place, will be written off for both books and tax purposes. If you don’t have an audited financial statement, but you do have written accounting procedures in place, then you can write off items with a value of $500 or less. To prepare for this safe harbor, you must have a capitalization policy in place by December 31, 2013.

Next Steps…
Below is a sample De Minimis Capitalization policy that can be used to ensure you qualify for the safe harbor provision. Please print, sign and date the election.  If you think the safe harbor rule is too restrictive to your business please contact your Beene Garter representative to discuss the issue immediately.

Sample De Minimis Capitalization Policy
For tax years beginning in 2014 and forward, {NAME OF BUSINESS} elects to treat as an expense for both books and income tax purposes property with a cost of ${VALUE} or less, including items that have a useful life of 12 months or less. It is {NAME OF BUSINESS}’s intention that this election complies with the IRS Section 1.263(a)-1(f) de minimis safe harbor election.

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