The American Taxpayer Relief Act of 2012 requires some symmetry in the accounting for asset acquisitions for financial reporting and tax reporting purposes that companies need to act on prior to January 1, 2014. If your company does not require significant amounts of fixed asset acquisitions and you receive an annual audit, you may want to secure the ability to deduct each fixed asset acquisition of less than $5,000.
The Opportunity
Each company can make an annual irrevocable election (“De Minimis Safe Harbor Election”) with its tax return to expense a certain amount of Tangible Property acquisitions.
- The election is an annual election
- The election must follow a certain format, be included in the originally filed return and may not be revoked
- The election is an “all or nothing election”, i.e., it can’t be applied to some acquisitions that qualify and not others
- The election is limited to certain dollar amounts ($500/$5,000) that can be less than the GAAP/Book Policy in place, but cannot be more than the GAAP/Book Policy in place. A company cannot expense higher dollar value asset acquisitions for tax return reporting purposes than they have expensed for financial statement reporting purposes
The Requirements
To make the tax election:
- Each company must adopt a Capitalization Policy for GAAP/Book purposes,
- The Capitalization Policy must be consistent with the Sample below, and
- The Capitalization Policy, must be in place by the first day of the year
Other Considerations
- The maximum expense amount is $5,000 per item for companies with an Applicable Financial Statement (“AFS”) (i.e., an Audit is an AFS, while Reviews and Compilations are not AFS) and $500 per item for companies without an AFS
- Companies must consider how this policy will impact items such as:
- Financial Statements,
- Debt covenants, or
- EBITDA targets, etc.
- Companies that make Large Quantity / Small dollar acquisitions:
- Groups of items acquired together must be reflected on the invoice on a per item basis to qualify
- For example, if a taxpayer acquires 100 computers that cost $1,500 a piece, the capitalization policy applies on a per computer basis as long as the invoice reflects 100 @ $1,500 each. Alternatively, if the invoice reflects 100 computers for a total of $150,000 the limit must be applied based on the full invoice amount of $150,000
- This fact situation could result in unwanted large GAAP/Book expense for a company
- Groups of items acquired together must be reflected on the invoice on a per item basis to qualify
- Items that qualify to be expensed for GAAP/Book purposes must still be tracked and reported for Personal Property tax purposes, adding to the complexity of the fixed asset accounting
Use the following sample capitalization policy to draft your company’s policy.
Sample Capitalization Policy
Purpose – These guidelines shall be observed by the management and staff of the company, who are directly concerned with the accounting and management of company?owned tangible property, in relation to all transactions related to the acquisition, maintenance, sale or other final disposition of such property.
The guidelines set forth in this document shall be known as the company’s capitalization policies, and serve as the company’s compliance with the Internal Revenue Code and the tangible property regulations promulgated thereunder. The guidelines are intended to be used for the company’s financial accounting purposes.
Tangible Property – Refers to all tangible personal and real property acquired or produced by the company as implements, tools, materials, supplies, equipment, furniture, land, buildings, and fixtures for its place(s) of business for the purpose of carrying out all aspects of business operations.
Tangible Property Not Subject to Capitalization
Alternative 1: De Minimis Amounts – Amounts paid to acquire or produce tangible property not exceeding [a specified dollar amount] are to be charged to the appropriate de minimis property expense accounts. All tangible property expenditures with an acquisition or production cost under the stated threshold are to be charged to the expense accounts. This policy does not apply to land and property intended to be included in inventory.
Alternative 2: De Minimis Amounts – Amounts paid to acquire or produce tangible property having an economic useful life (as defined in §1.162?3(c)(4)) of 12 months or less are to be charged to the appropriate de minimis property expense accounts. All tangible property expenditures with an acquisition or production cost under the stated threshold are to be charged to the expense accounts. This policy does not apply to land and property intended to be included in inventory.
Important Notes
See Reg. §1.263(a)?1(f)(1)(i) and (ii).
This policy must be in place effective on the first day of the taxpayer’s year in which the de minimis safe harbor rule is elected. In addition, the taxpayer must expense items for books pursuant to the policy. In other words, the item must be expensed for book and tax. It is possible that the book limitation may be larger than the tax limitation, but only amounts qualifying for the tax limitation ($5,000/$500 per item) may be deducted. See § 1.263(a)?1(f)(7), example 4.
