Have you ever wondered when you must capitalize and depreciate an acquisition vs. expensing it in the current year?
For example, you may acquire and use an asset for more than one year (indicates capitalization) but its cost is minimal. Recent IRS regulations have provided guidance and safe harbors with regard to this question. These rules generally apply beginning January 1, 2014 but you may want to act now.
The new regulations contain the following two safe harbors (among many other things) that may be relevant to you as an independent insurance agent:
- Materials and supplies costing $200 or less can be expensed; and
- Purchases costing $500 or less ($5,000 in certain circumstances) can be expensed if so elected.
$500 expensing criteria:
- You must have a written accounting policy by the beginning of the tax year, e.g. January 1, 2014, to expense items for non-tax purposes:
- Costing $500 or less (or other lower dollar amount you choose); or
- An economic life of 12 months or less.
- You must expense the items for your books and records used for non-tax purposes according to the written policy.
- The amount paid for each item must be $500 or less (or lower dollar threshold chosen) as detailed on the purchase invoice.
- You must include an appropriate election annually on a timely filed return.
The $5,000 instead of $500 threshold only applies if you have an “applicable financial statement” which is a financial statement that is: 1) filed with the SEC, 2) a certified audited financial statement used for certain purposes, or 3) provided to any Federal or state agency (other than the IRS).
The details provided here are general overviews of these safe harbors. There are various details applicable to these safe harbors and other provisions of the regulations not covered here as they are outside the scope of this article. Additional information can be found here or your local CPA.
Article written by Richard R. Dahl, a CPA and Senior Tax Manager with Security National Life Insurance. The content of this article is not intended as tax advice and cannot be used for avoiding tax penalties or promoting or recommending any transaction. Individual circumstances should be discussed with a qualified tax professional.
