Repair Regs and De Minimis Safe Harbor

Does the end of year deadline for business owners affect you?

Significant changes to regulations regarding how taxpayers should account for, deduct and capitalize expenditures related to amount paid to acquire, produce or improve tangible property (the “repair regulations”) have been made by the IRS and take effect for tax years beginning on or after January 1, 2014. These regulations supersede the temporary regulations that were issued in December 2011. Taxpayers have the option of applying the final regulations retroactively to tax years beginning on or after January 1, 2012.

In the case of prior expenditure that may need adjusting under the regulations, corrections can be made under favorable accounting method change procedures for the 2014 tax year. However, the only safe harbor that needs to be considered in 2013 is the De Minimis Safe Harbor. Affected businesses will need to adopt new written accounting policies before January 1, 2014.

A taxpayer may elect a De Minimis safe harbor to deduct the amounts paid to acquire or produce tangible personal property up to a dollar threshold. The limit is $5,000 per invoice or per item for taxpayers with an Applicable Financial Statement (AFS), but only $500 for those who do not.

An Applicable Financial Statement is one the three types of financial statements:

  1. 10-K filed with the SEC
  2. A certified audited financial statement prepared by an independent CPA
  3. A financial statement required for a federal or state governmental entity

The expenditure must always be treated as a deduction in the AFS to qualify for the safe harbor.

In order for a taxpayer to use the De Minimis Safe Harbor, taxpayers must have a written capitalization policy in place at the beginning of their tax year. This means that in order for calendar-year taxpayers to use this provision, there must be a written policy in place by January 1, 2014.

The De Minimis privilege requires an annual election in a timely filed tax return.

While this article focuses on the De Minimis Safe Harbor policy due to the impending deadline (it must be drafted by year end), there are several other important changes in the Tangible Property Regulations that need to be considered for your business.

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