The Internal Revenue Service (IRS) implemented the tangible property regulations (TPRs) with the issuance of T.D. 9689, effective for taxable years ending on or after January 1, 2014. These regulations provide guidance on whether certain expenditures should be capitalized or expensed for tax purposes. One important aspect of the TPRs is the introduction of a de minimis safe harbor, which allows taxpayers to deduct a specified amount of expenditures without having to determine whether they meet the criteria for capitalization.
Under the de minimis safe harbor, taxpayers can deduct up to $2,500 of expenditures per invoice (or per item as substantiated by the invoice) for property costing less than a certain dollar amount or property with an economic useful life of 12 months or less. However, if the taxpayer prepares applicable financial statements (AFS), such as those required to be filed with the Securities and Exchange Commission (SEC) or certified audited financial statements, the safe harbor threshold is increased to $5,000.
To be eligible for the de minimis safe harbor, a taxpayer must meet the following criteria:
1. At the beginning of the tax year, the taxpayer must have a written accounting policy that treats amounts paid for property costing less than a specified dollar amount and/or property with a useful life of 12 months or less as an expense for non-tax purposes.
2. The taxpayer must treat the amounts paid for such property as an expense on its applicable financial statement, in accordance with its written accounting policy.
3. The amount paid for the property must not exceed $2,500 per invoice (or per item as substantiated by the invoice).
It's important to note that an applicable financial statement refers to a financial statement that is required to be filed with the SEC, a certified audited financial statement accompanied by a report from an independent certified public accountant, or a financial statement (other than a tax return) that must be provided to a federal or state government agency.
To make the de minimis safe harbor election, a taxpayer must attach a statement titled "Section 1.263(a)-1(f) de minimis safe harbor election" to their timely filed original federal tax return, including extensions, for the tax year in which the amounts are paid. The statement should include the taxpayer's name, address, taxpayer identification number, and a declaration that the taxpayer is making the de minimis safe harbor election under Regulation Section 1.263(a)-1(f).
For taxpayers without an applicable financial statement, the safe harbor threshold is reduced to $2,500. However, even for these taxpayers, it is recommended to have written accounting procedures in place to support the treatment of expenditures as expenses for non-tax purposes.
Overall, the implementation of the tangible property regulations and the de minimis safe harbor provides taxpayers with a simplified approach for deducting certain expenditures, promoting consistency and reducing the administrative burden associated with determining whether to capitalize or expense such amounts.
Example Policy:
[Your Business Name] Written Accounting Policy for De Minimis Safe Harbor
Effective Date: [Insert Date]
Purpose
This policy establishes [Your Business Name]’s approach to expensing amounts paid for tangible property in accordance with the de minimis safe harbor election under IRS regulations (§1.263(a)-1(f)). This policy is specifically intended to streamline compliance with tax reporting requirements and reduce the administrative burden associated with capitalization and depreciation of small-dollar purchases. This accounting policy establishes the minimum cost (capitalization amount) that shall be used to determine the capital assets to be recorded in our books and financial statements.
Policy
1. Capital asset definition and thresholds : A “capital asset” is a unit of property with a useful life exceeding one year and a per-unit acquisition cost exceeding $2,500/$5,000*. Capital assets will be capitalized and depreciated over their useful lives. We will expense the full acquisition cost of tangible personal property below these thresholds in the year purchased.
2. Capitalization method and procedure: All capital assets are recorded at historical cost as of the date acquired. Tangible assets costing below the aforementioned threshold amount are recorded as an expense for our annual financial statements (or books). In addition, assets with an economic useful life of 12 months or less must be expensed for both book and financial reporting purposes.
3. Documentation : Invoices substantiating the acquisition cost of each unit of property are to be retained for a minimum of seven (7) years.
*Tax capitalization threshold: The permissible ceiling for deducting otherwise capitalizable expenditures is $5,000 when our business has applicable financial statements. The threshold is limited to $2,500 in the absence of applicable financial statements.
Acknowledgment
I acknowledge that I have reviewed and understand this written accounting policy. I agree to implement and apply it consistently to all applicable purchases for tax purposes during the taxable year.
Signature: _____________________________
Name: ________________________________
Title: ________________________________
Date: ________________________________