Repair Regulations: Limiting Business Deductions

In September 2013, the IRS released new rules regarding expensing repairs/supplies and depreciating assets.  They are providing clarity on how you can or cannot write off purchases of equipment, tools, supplies, etc.  For years, we have used the Generally Accepted Accounting Principle of expensing items that small businesses purchase of up to $500 or even $1000 when appropriate. Money on Hook

These rules are effective January 1, 2014 and will affect over 4 million taxpayers.  The rule is limiting businesses to expense a purchase which is $200 or less and consumed within a year.  Any purchase of non-consumable items over $200 must be separately tracked and depreciated.  Instead of lumping items like cheap printers, phones, routers, etc. into office supplies, these items must now be put on the balance sheet and depreciated and tracked.

There are two exceptions to the $200 limit:

  1. If the taxpayer has audited financial statements or filing statements with the SEC, they can have a limit of $5000.  (This is not going to happen to most small businesses.)
  2. If the taxpayer has a written accounting policy in place before 01-01-14.  This written policy specifies that any asset acquired with a cost of up to $500 will be expensed.  (Otherwise the limit is $200)

Here is a sample of what your safe-harbor election accounting policy may look like:

Capitalization Policy for Acquisition of Repairs and Fixed Assets

Purpose: These guidelines shall be observed by the management and staff of the company, who are directly concerned with the accounting and management of company-owned tangible property, in relation to all transactions related to the acquisition, maintenance, sale or other final disposition of such property.

The guidelines set forth in this document shall be known as the company’s capitalization policies and serve as the company’s compliance with the Internal Revenue Code and the tangible property regulations promulgated thereunder.  The guidelines are intended to be used for the company’s financial accounting purposes.

Tangible Property: Refers to all tangible personal and real property acquired or produced by the company as implements, tools, materials, supplies, equipment, furniture, land, buildings, and fixtures for its place(s) of business for the purpose of carrying out all aspects of business operations.

Tangible Property Not Subject to Capitalization: (De Minimis Amounts) Amounts paid to acquire or produce tangible property not exceeding or $500 are to be charged to the appropriate de minimis property expense accounts.  All tangible property expenditures with an acquisition or production cost under the stated threshold are to be charged to the expense accounts.  This policy does not apply to land and property intended to be included in inventory.

Sign and date your written policy.

About Renee Daggett

Renee Daggett is the founder and President of Admin Books, Inc, a bookkeeping and tax firm. She is also the author of “Your Financial Flight Plan: Pilot Your Business To Profitability”. Renee lives her life with purpose and helps her clients find peace of mind as they achieve success in their businesses.

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