New regulations potentially affect every taxpayer
On September 13, 2013, the Internal Revenue Service released final regulations addressing the treatment of repairs and maintenance expenses for federal income tax purposes.
The final regulations are extremely complex, and create significant changes in how these expenses have typically been handled by most taxpayers.
They also provide defined procedures for expensing de minimis items that require immediate action.
These new regulations potentially affect every taxpayer, including individuals, that operates a business, farm or rental activity. Ignoring them could affect your ability to immediately deduct certain expenditures you incur in your activity.
Specifically, taxpayers with applicable financial statements are allowed to expense immediately amounts not exceeding $5,000 per invoice OR per item, no questions asked, and thus avoid having to capitalize and depreciate such items over time.
Applicable financial statements are defined as:
* Financial statements submitted to the SEC
* Audited financial statements
* Statements that are required to be submitted to a federal or state government or any federal or state agency (e.g., as is required to be submitted for a contractor’s license)
For taxpayers who do not have applicable financial statements as defined above, the de minimis threshold is reduced to $500 per invoice or per item that may be immediately expensed.
To take advantage of this opportunity, qualifying taxpayers must also:
* Treat qualifying de minimis expenditures consistently for both financial and tax reporting.
* Include an irrevocable annual election to expense these items with their timely filed federal income tax return.
* Implement a written policy related to the expensing of de minimis expenditures prior to the beginning of the tax year. Hence, calendar-year taxpayers who wish to take advantage of this opportunity in 2014 must have a qualifying written policy in place prior to January 1, 2014.
Written policies must contain procedures indicating that amounts will be expensed for nontax purposes as follows:
* Amounts paid for property costing less than $5,000/$500 (as applicable); or
* Amounts paid for property with an economic useful life of 12 months or less
The requirement for a written policy is mandatory for taxpayers with an applicable financial statement. While the regulations do not specifically require a written policy for taxpayers who do not have an applicable financial statement, it is strongly recommended that a written policy be implemented nonetheless.
Without a written policy, taxpayers qualifying for the $500 de minimis limit could be required to demonstrate that such a policy exists to support the expensing of these items. Providing such proof could be problematic if the policy is not in writing.
A sample written policy is available for download on our website, www.egpcpas.com. Click on the “News & Articles” link and look for a copy of this article, then scroll down to the embedded link.
The silver lining is that the de minimis rules allow the expensing of smaller items without having to worry about being challenged by the IRS, and flexibility is provided to make elections to apply the de minimis provisions on a year-by-year basis.
One important thing to note; expenditures that do not qualify under the de minimis provisions described above will have to be reviewed to determine if they must be capitalized or expensed under some other provision of the final regulations.
This is just the first and most immediate action required by the new regulations. Other actions will be required over the coming year, but those are beyond the scope of this article. Contacting a professional advisor familiar with these regulations is highly recommended to get started on compliance and stay on the IRS’ good side.
Lane Keeter, CPA is Office Managing Partner of the Heber Springs Office of EGP, PLLC, CPAs & Consultants