The Internal Revenue Service has issued new, final regulations that have significant impact on the tax treatment of expenditures made in connection with the acquisition and use of tangible property, beginning in taxable years beginning in 2014. The regulations specify that a business may write off the full cost of certain items rather than recover it over a number of years through depreciation. While section 179 expensing may apply to certain capital expenditures, it is subject to annual dollar limitations and phase outs; the new regulations provide expensing for items subject neither to an overall dollar limitations nor phase out.
One of the provisions of particular importance permits a business to expense for tax purposes entire classes of items that are not inventoriable so long as individually they do not exceed a specific dollar amount. This is not self-executing; it requires that a business have written accounting procedures in place before the beginning of its tax year beginning in 2014.
The template below should be filled in, signed, and dated before the first day of the 2014 taxable year. Doing so will enable you to deduct the costs of each item whose cost is as much as $500 if you do not have an applicable financial statement ($5,000 if you do) as you choose by filling in the blanks in paragraph 2.4.1. Implementation of the policy will require you to monitor the recording of items on the books and records. Essentially, you must determine the cost of individual items in accordance with its associated invoice and compare this to the threshold level you establish in paragraph 2.4.1. and expense such item if it does not exceed the applicable threshold and generally capitalize on the balance sheet such item if it does. You must also fill in the name or position of the person charged with implementing these procedures in paragraph 1.3 and 2.1, and the starting month of your fiscal/taxable year in paragraph 1.2.
The above is a safe harbor, and in some cases you may be able to expense costs in excess of such thresholds you have selected. If, in the course of audit, you and the Service’s auditing agents have established a higher dollar level for certain items that they will not review, those higher levels shall apply and continue to apply rather than the safe harbor levels.
Once completed please return an executed copy of this template for our records and to assist us in the preparation of future income tax returns. If you have any further questions call Twilley, Rommel & Stephans at 410-749-1919.
Written Accounting Procedures Relating to Capital Acquisition
___________________, a business (the “Business”), adopts, until otherwise modified, the following accounting procedures to be followed in connection with its books and records in respect of purchases of goods and services for applying generally accepted accounting policies:
These procedures apply effective __________ 1, 2014, the first day of the Business’s fiscal year to the person or persons charged from time to time to keep the books and records of the Business with respect to transactions involving Business that involve the acquisition of goods or the performance of services in connection with certain expenditures made by Business.
The Business _________ (bookkeeper, accountant, other) shall follow these procedures in carrying out the maintenance of Business’ books and records.
1.4 Definitions and Acronyms
1.4.1 An applicable financial statement is Business’s financial statement that has the highest priority in the following list in descending priority:
(i) A financial statement required to be filed with the Securities and Exchange Commission (SEC) (the 10-K or the Annual Statement to Shareholders);
(ii) A certified audited financial statement that is accompanied by the report of an independent CPA (or in the case of a foreign entity, by the report of a similarly qualified independent professional), that is used for —
• Credit purposes;
• Reporting to shareholders, partners, or similar persons; or
• Any other substantial non-tax purpose; or
(iii) A financial statement (other than a tax return) required to be provided to the federal or a state government or any federal or state agencies (other than the SEC or the Internal Revenue Service).
1.4.2 Materials and supplies are tangible items used or consumed in the operations (other than inventory), provided that it is one of the following categories:
(i) Is a component acquired to maintain, repair, or improve a unit of tangible property owned, leased, or serviced by the taxpayer and that is not acquired as part of any single unit of tangible property;
(ii) Consists of fuel, lubricants, water, and similar items reasonably expected to be consumed in 12 months or less, beginning when used in taxpayer’s operations;
(iii) Is a unit of property that has an economic useful life of 12 months or less, beginning when the property is used or consumed in the taxpayer’s operations;
(iv) Is a unit of property that has an acquisition cost or production cost (under the unicap rules) of $200 or less (or other amount as identified in published guidance of the Internal Revenue Service); or
(v) Is identified in published guidance in the Federal Register or in the Internal Revenue Bulletin under the grouping of materials and supplies for which such treatment is permitted.
1.4.3 Unit of property means all components of personal and real property that are functionally interdependent; however, if at the time a unit of property is initially placed in service Business has properly treated as being within a different class of property under the MACRS classes than the class of the unit of property of which the component is a part, or if Business properly depreciates for tax purposes using a different depreciation method than that used for the unit of property of which the component is a part, the component is a separate unit of property.
1.4.4 Functional interdependence exists when the placing in service of one component by the taxpayer is dependent on the placing in service of the other component by the taxpayer.
1.4.5 Routine maintenance is the recurring activities that a taxpayer expects to perform as a result of the taxpayer’s use of the unit of property to keep the unit of property in its ordinarily efficient operating condition. Routine maintenance activities include, for example, the inspection, cleaning, and testing of the unit of property, and the replacement of parts of the unit of property with comparable and commercially available and reasonable replacement parts.
(i) In the case of property other than a building, the activities are routine only if, at the time the unit of property is placed in service by the taxpayer, the taxpayer reasonably expects to perform the activities more than once during the class life of the unit of property. Among the factors to be considered in determining whether a taxpayer is performing routine maintenance are the recurring nature of the activity, industry practice, manufacturers’ recommendations, and Business’s experience. The class life of a unit of property is the recovery period prescribed for the property under the alternative depreciation system, regardless of whether the property is depreciated under that system. . If the unit of property is comprised of more than one component with different class lives, then the class life of the unit of property is deemed to be the same as the component with the longest class life.
(ii) In the case of a building, routine maintenance activities include, for example, the inspection, cleaning, and testing of the building structure or each building system, and the replacement of damaged or worn parts with comparable and commercially available replacement parts. Routine maintenance may be performed any time during the useful life of the building structure or building systems.
1.4.6 Rotable spare parts are materials and supplies that are acquired for installation on a unit of property, removable from that unit of property, generally repaired or improved, and either reinstalled on the same or other unit of property or stored for later installation.
1.4.7 Temporary spare parts are materials and supplies that are used temporarily until a new or repaired part can be installed and then are removed and stored for later (emergency or temporary) installation.
1.4.8 Standby emergency spare parts are materials and supplies that are:
(i) Acquired when particular machinery or equipment is acquired (or later acquired and set aside for use in particular machinery or equipment);
(ii) Set aside for use as replacements to avoid substantial operational time loss caused by emergencies due to particular machinery or equipment failure;
(iii) Located at or near the site of the installed related machinery or equipment so as to be readily available when needed;
(iv) Directly related to the particular machinery or piece of equipment they serve;
(v) Normally expensive;
(vi) Only available on special order and not readily available from a vendor or manufacturer;
(vii) Not subject to normal periodic replacement;
(viii) Not interchangeable in other machines or equipment;
(ix) Not acquired in quantity (generally only one is on hand for each piece of machinery or equipment); and
(x) Not repaired and reused.
Unless otherwise provided, references to sections are to Internal Revenue Code regulations if they contain a period (“.”) and to the Internal Revenue Code if it does not.
The following set of procedures must be followed to accomplish the Business’ policy with respect to acquisition of goods and services.
2.1 Input. All purchases must be entered in the financial system with the following details included:
• Date of purchase;
• Amount of each purchase per the invoice;
• Supplier; and
• Make, model, warranty/guarantee information.
2.2 Rotable parts. The general policy of Business with respect to rotable or temporary spare parts is to expense such costs. However, Business may from time to time elect to capitalize the costs of such parts.
2.3 Materials and supplies. The general policy of Business with respect to materials and supplies other than rotable or temporary spare parts is to expense such costs.
2.3.1 Property subject to uniform capitalization. Notwithstanding anything herein to the contrary, Business shall capitalize amounts paid for rotable or temporary parts to the extent such costs are subject to capitalization under §263A if the amounts paid for such items comprise the direct or allocable indirect costs of other property produced by the taxpayer or property acquired for resale.
2.4 Fixed Assets and Depreciation
2.4.1 De minimis policy. The general capitalization policy is that all items costing in excess of $____ will be recorded as an asset on the balance sheet; those costing no more than $______ will be recorded as an expense on any income statement. For these purposes, the cost of any item that has a useful economic life of 12 months or less shall be treated as an expense on the income statement. No item that is subject to uniform capitalization under §263A shall be expensed regardless of cost. No amounts paid for land, no amounts paid for rotable, temporary, or standby parts that have been capitalized, and no amounts paid for rotable and temporary spare parts that are accounted for under the optional method of accounting pursuant to §1.162-3(e).
22.214.171.124 For these purposes, the cost of an item will be determined with reference to the amount listed on any invoice received in respect of its payment. For these purposes the additional costs of acquiring or producing include in the cost of the item if these costs are not included in the same invoice as the item. However, Business must include in the cost of such item all additional costs (for example, delivery fees, installation services, or similar costs) if these additional costs are included on the same invoice with the tangible item. If the invoice includes amounts paid for multiple tangible properties and also includes additional invoice costs related to these multiple properties, then Business will allocate the additional invoice costs to each item using a reasonable method, and each item, including allocable labor and overhead.
126.96.36.199 Business is not required to include in the cost of the item the additional costs of acquiring or producing such item if these costs are not included in the same invoice as the item. However, Business must include in the cost of such item all additional costs (for example, delivery fees, installation services, or similar costs) if these additional costs are included on the same invoice with the item.
188.8.131.52 For these purposes, if the invoice includes amounts paid for multiple tangible properties and also includes additional invoice costs related to these multiple properties, then Business shall allocate the additional invoice costs to each item using a reasonable method, and each item, including allocable labor and overhead, must meet the requirements of paragraph 2.4.1. Reasonable allocation methods include, but are not limited to, specific identification; a pro rata allocation; or a weighted average method based on the item’s relative cost. For these purposes, additional costs consist of the costs of facilitating the acquisition or production of such item under §1.263(a)-2(f) and the costs for work performed prior to the date that the tangible property is placed in service under §1.263(a)-2(d).
184.108.40.206 Notwithstanding the above, Business intends to continue any agreement it now has or may reach with its IRS examining agents that, as an administrative matter, based on risk analysis or materiality, with respect to certain items certain amounts in excess of the de minimis safe harbor limitations set in paragraph 2.4.1 the IRS examining agents will not review as not material or otherwise and Business may expense such items on its income statement.
220.127.116.11 Notwithstanding the dollar amounts listed in paragraph 2.4.1, it is the intention of Business to take full advantage of the dollar limitations permitted by §1.263-1(f)(1)(i)(D) if applicable, and if Business has used a lower level applicable to a Business that has no applicable financial statement under §1.263(a)-1(f)(1)(ii)(D), the higher number shall apply if the Business has an applicable financial statement for the taxable year and the books and records shall reflect this adjustment.
2.4.2 Other property. Generally, all capital assets will be capitalized and depreciated over their estimated useful lives. The straight line basis will be used, with depreciation charged beginning in the month that the asset is placed in service.
2.5 Interpretation of these procedures. These provisions are intended to meet the requirements of Treasury regulations of written accounting procedures for a business with an applicable statement and accounting procedures for a business without an applicable financial statement, and shall be interpreted and implemented in accordance with those regulations.
Officer having authority