Asset expense policy
The IRS has listened to the tax professionals and given businesses some administrative relief by not requiring them to capitalize and depreciate small items. By adding detailed descriptions to purchases in your accounting systems it will allow us to quickly determine whether certain items should be capitalized or not also relieving follow up questions from us.
We look forward to using this change to the regulations to help reduce your tax burden to the correct tax, which is the lowest legal tax, during this 2016 filing season and beyond.
What should I do?
Your business should have a written policy stating that it will deduct individual items that cost less than applicable amount of $2,500 or the maximum amount allowed under the Internal Revenue Code.
When entering the description into your accounting system for purchases of items where the cost is greater than $2,500 enter the number of items purchased. For example – if you purchase computers for $10,000 describe the number of computers purchased so it is obvious whether or not the items can be expensed currently or must be capitalized and depreciated. If two or three computers were purchased, the probability is that most, if not all, of the $10,000 should be capitalized and depreciated. If five or six computers were purchased, the probability is that most, if not all, of the $10,000 would qualify as a current year expense.
Are all purchases subject to this regulation?
No. Supplies that are used in day-to-day operations of your business are still currently deductible as they have always been. Materials and supplies used to produce inventory must still be included in the cost of the inventory. Materials and supplies used to produce a large asset, such as a building, must still be included in the cost of the asset and depreciated over the appropriate useful life.
Under the Internal Revenue Code a business is allowed to deduct ordinary and necessary expenses incurred during the tax year in carrying on a trade or business. There are also regulations on when an expense is currently deductible and when the cost of the item purchased must be capitalized and depreciated over a number of years.
Due to multiple court cases on the subject of what can be deducted vs. capitalized in years past there has been confusion and inconsistency of treatment from one company to another. For the tax year 2014 the IRS finalized regulations that stated most businesses could elect to expense items that cost less than $500 and would have to capitalize and depreciate items purchased that cost $500 or more. Because the dollar value was so low it caused significant discussion and complaints from tax preparers around the country. The IRS has modified its position and will now allow electing companies to deduct items costing up to $2,500 per unit. Individual items over the $2,500 limit are to be capitalized and depreciated over an appropriate number of years.
Document dated 1/13/2016