The Internal Revenue Service has recently issued final tax regulations regarding the deducting and capitalizing of business expenses. These regulations are effective for tax years beginning on or after January 1, 2014. As of that same date, 50% bonus depreciation will be eliminated and Section 179 depreciation will be drastically reduced, so tax planning for major business acquisitions becomes more challenging than ever.
Under the final IRS regulations, capital expenditures must be capitalized and depreciated over the useful life of the asset, while incidental repairs are deducted in the year incurred. Capital expenditures include amounts incurred to add to the value or lengthen the useful life of property, or adapt the property to a new use. If an expenditure does not meet this criteria, it is an incidental repair, which can be immediately deducted.
Taxpayers can make a “de minimus” election to expense all materials and supplies, as well as expenditures of tangible property, if the expenditures are small in amount. If a business issues a certified financial statement and has a written accounting policy at the beginning of the tax year for expensing amounts paid for such property, they can expense items that do not exceed $5,000 per invoice. If the business does not issue a certified financial statement, they can expense items that do not exceed $500 per invoice.
Elections under the final IRS regulations are treated as an automatic change in accounting method which requires IRS consent. That consent is obtained by filing Form 3115 (Application for Change in Accounting Method) with the business’ tax return in the year of the change.
We can help you determine if your business should make these elections regarding the purchase of tangible property. If you have any questions about these elections or any other tax opportunities for your business, please contact Andrew Ross, CPA at Bedard, Kurowicki & Co., CPA’s at (908) 782-7900 or visit www.bkc-cpa.com.