IRS provides guidance on whether expenses can be deducted instead of depreciated by Elaine360

Elaine Golden Gealer, Brentwood condos, Brentwood townhomes, Brentwood real estate, Brentwood new construction, Brentwood condominiums, Westwood condos, Westwood townhomes, Westwood real estate, Westwood new construction, Westwood condominiums, Westchester condos, Westchester townhomes, Westchester real estate, Westchester construction, Westchester condominiums, Toluca Lake condos, Toluca Lake townhomes, Toluca Lake real estate, Toluca Lake construction, Toluca Lake condominiums, North Hollywood condos, North Hollywood townhomes, North Hollywood real estate, North Hollywood new construction, North Hollywood condominiums, Sherman Oaks condos, Sherman Oaks townhomes, Sherman Oaks real estate, Sherman Oaks new construction, Sherman Oaks condominiums, Encino condos, Encino townhomes, Encino real estate, Encino new construction, Encino condominiums, Beverly Hills condos, Beverly Hills townhomes, Beverly Hills real estate, Beverly Hills new construction, Beverly Hills condominiums, West Los Angeles condos, West Los Angeles townhomes, West Los Angeles real estate, West Los Angeles new construction, West Los Angeles condominiums, West Hollywood condos, West Hollywood townhomes, West Hollywood real estate, West Hollywood new construction, West Hollywood condominiums, Santa Monica condos, Santa Monica townhomes, Santa Monica, real estate, Santa Monica new construction, Santa Monica condominiums, San Fernando Valley condos, San Fernando Valley townhomes, San Fernando Valley real estate, San Fernando Valley new construction, San Fernando Valley condominiumsBusinesses typically have a policy of expensing (that is, currently deducting instead of depreciating) items that cost less than a threshold amount.

It’s simply not worth the trouble of depreciating low-cost items over many years. The amount businesses establish as their expensing thresholds varies widely. Smaller businesses have a threshold of $100-$200, while large businesses have thresholds in the thousands.

Until now, the IRS provided no guidance on what the threshold for deductible, minor expenses should be. It was always possible that the IRS would argue that a taxpayer’s threshold was too high, and that an expense should have been depreciated.

However, this has changed. New IRS regulations that go into effect on Jan. 1, 2013, enshrine this long-term threshold expensing practice into law by establishing a new “de minimis expensing safe harbor.” (IRS Reg. 1.263(a)-1(f).) For the first time, the IRS has created specific dollar amounts that may be expensed as “de minimis” (Latin for minor or inconsequential).

To qualify for this de minimis expensing safe harbor, a taxpayer must:

  • establish at the beginning of the tax year a written accounting procedure requiring it to expense amounts paid for property either (1) costing less than a certain dollar amount, and/or (2) with an economic useful life of 12 months or less;
  • actually treat such amounts as currently deductible expenses on its books and records; and
  • file an election with its tax return for the year to use the de minimis safe harbor.

How much you get to deduct under this safe harbor depends on whether you have an “applicable financial statement.” This is a certified financial statement by a CPA, or a financial statement (other than a tax return) your business files with the SEC or other state or federal agency (not including the IRS).

If, like most smaller taxpayers, you don’t have such a financial statement, you may use the de minimis safe harbor only for property whose cost does not exceed $500 per invoice, or $500 per item as substantiated by the invoice. If the cost exceeds $500 per invoice (or item), no part of the cost may be deducted by using the de minimis safe harbor.

Example: Abe has no applicable financial statement. Abe purchases 10 printers at $250 each for a total cost of $2,500 as indicated by the invoice. Abe has accounting procedures in place at the beginning of the year to expense amounts paid for property costing less than $500, and Abe treats the amounts paid for the printers as an expense on its books and records. The amounts paid for the printers meet the requirements for the de minimis safe harbor. Abe may currently deduct the entire amount as ordinary and necessary business expense. (IRS Reg. 1.263(a)-1(f), example 1.)

If you have an applicable financial statement, then you may increase the per item or per invoice amount up to $5,000.

When you make this election, it applies to all expenses you incur that qualify for the de minimis safe harbor. You cannot pick and choose which items you want to include.

To take advantage of the de minimis safe harbor, you must file an election with your tax return each year, using the following format:

Section 1.263(a)-1(f) de minimis safe harbor election

Taxpayer’s name:

Taxpayer’s address:

Taxpayer’s identification number:

The taxpayer is hereby making the de minimis safe harbor election under section 1.263(a)-1(f).

If you want to take advantage of the de minimis safe harbor in 2014, be sure to adopt a written accounting policy to do so by the end of December 2013. Otherwise, you’ll have to wait until 2015 to use it.

DRE #00598428
Senior Director, Coldwell Banker New Homes Division
With over 200 condominium, townhome and loft projects successfully marketed

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