It's January — time to update your capitalization policy! A recent IRS notice increased the safe harbor amount for deducting tangible property expenses currently, starting January 1. That means you'll need to review the written policy you use to set a threshold for which qualifying costs you'll record as assets and which you'll charge to expense.
As you may remember, the "repair regulations" became effective in January 2014. This guidance from the IRS on the capitalization and repair of assets applies to all businesses, including sole proprietorships, rentals, and farms. The guidance explains the federal income tax treatment of expenditures you make for materials and supplies, repairs and maintenance, and business property you buy, produce, or improve. In general, you're required to capitalize these items.
However, the regulations provide a de minimis safe harbor for expensing certain costs. The amount of the safe harbor depends on the type of financial statement you have prepared. For instance, if you have an applicable financial statement, the safe harbor is $5,000. (An example of an applicable financial statement is a certified audited statement with a report by an independent CPA that you use for credit or reporting purposes.)
If your business does not have an applicable financial statement, the de minimis safe harbor was originally set at $500. Beginning January 1, 2016, the safe harbor is $2,500 per invoice or item with a supporting invoice.
Please give us a call to discuss how this change to the capitalization and repair regulations will affect your business and what you need to do to update your accounting policy.
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