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IRS Capitalization and Repair Rules

by | Dec 12, 2018 | Deadlines | 0 comments

The IRS issued over 250 pages of final regulations affecting materials and supplies, expenditures to acquire, produce or improve personal tangible property, real property, and certain intangibles. These rules were effective beginning Jan. 1, 2014.

Tangible personal property used or consumed in the business (other than inventory) must be capitalized if:

  • The property has an economic useful life of more than 12 months, beginning when the property was placed in service, and
  • The cost is over $2,500 for taxable years beginning on or after Jan. 1, 2016.

Amounts paid to acquire or produce incidental materials and supplies that are carried on hand and for which inventory is not kept, are deductible in the tax year for which they are paid. Non- incidental materials and supplies with a cost of $200 or less are deductible in the tax year that they are consumed or used in the operation of the business. The cost limits are part of a de minimis safe harbor rule, which requires the following:

  • Taxpayers must have a written accounting policy in place at the beginning of the taxable year treating as an expense for non-tax purposes:
    • Amounts paid for property costing less than the specified dollar amount or with an economic useful life of 12 months or less and
    • The taxpayer treats the amount paid for the property as an expense on its books and records in accordance with these accounting procedures.
  • Taxpayers must file an annual election statement on the tax return for the year elected.

If not already done, all businesses should review and update their capitalization policies to increase the threshold to $2,500. Even though the capitalization policies are changed, the items being expensed may still need to be reported for personal property taxes.

Please contact our office to discuss these rules as it applies to your business, and to receive a free capitalization policy form.