New Rules for Deducting or Capitalizing Tangible Property Costs

The IRS has issued new regulations for determining whether amounts paid for property may be currently deducted as business expenses or must be capitalized.

In general, a taxpayer must capitalize amounts paid for real or tangible personal property. However, under a de minimis rule, taxpayers would not have to capitalize amounts paid for a unit of property if certain requirements are met:

• The taxpayer has an applicable financial statement (AFS), such as a certified audited financial statement (please note that there is no de minimis rule for a business that does not have an AFS);
• At the beginning of the taxable year, the taxpayer has written accounting procedures for expensing amounts paid for such property costing less than a certain dollar amount;
• The taxpayer treats the amounts paid during the year as an expense on its AFS  in accordance with its written accounting procedures, and
• The total aggregate of amounts paid and not capitalized under the de minimis rule for the tax year are less than or equal to the greater of:
  • 0.1% of the taxpayer's gross receipts for the taxable year as determined for Federal income tax purposes; or
  • 2% of the taxpayer's total depreciation and amortization expense for the taxable year as determined in its AFS.

Illustration: AB Corp (ABC) has an AFS and a written policy at the beginning of the tax year to expense amounts paid for property costing $500 or less. ABC buys 100 computers at $500 each (total cost of $50,000). In addition, ABC buys 50 office chairs at $100 each (total cost of $5,000). ABC treats the amounts paid for the computers and office chairs as expenses on its AFS. ABC has gross receipts of $55,000,000 and reports $275,000 of depreciation and amortization on its AFS.

To elect the de minimis rule, ABC's total aggregate amounts paid and not capitalized under the de minimis rule must be less than or equal to the greater of $55,000 (0.1% of $55,000,000 total gross receipts) or $5,500 (2% of $275,000 total depreciation and amortization). ABC paid a total of $55,000 ($50,000 + $5,000) for the computers and office chairs. The total aggregate amounts paid and not capitalized under the de minimis rule is $55,000 (0.1% of total gross receipts), the greater of the two limitations. As a result, ABC may treat the total aggregate amounts paid as de minimis and is not required to capitalize the $55,000 paid to buy the computers and office chairs.

The regulations generally are effective in tax years beginning after December 31, 2011.