2014 Asset Capitalization Policy

Staring January 1, 2014 there are new capitalization regulations and requirements for business assets that businesses must follow.  Capitalization typically applies to asset purchases and/or improvements that must be depreciated over time.  Businesses have the option to implement the new policies for the 2013 tax year if they had an acceptable capitalization policy in place at the start of 2013.  More likely, most businesses will want to view this as a 2014 item.  This is a pretty complicated regulation with lots of details, but this email should give you an understanding of the high-level concept.

The new regulations state that businesses have two potential thresholds to consider under which they don't have to capitalize and depreciate an asset.  For those businesses that have applicable financial statements (those filed with the SEC, a certified audited financial statement, or have submitted financial statements to the government, other than the IRS or SEC), the threshold of property that can be expensed without being capitalized is $5,000 per invoice.  For businesses that do not meet the previous qualifications, the threshold is $500.  In order to stay compliant with any of the above, the taxpayer will also need to attach a statement about the capitalization policy to the tax return.

If businesses wish to take advantage of this regulation and stay compliant, they need to have a written capitalization policy in place at the start of the tax year, so there is a short-term action to be taken before 2014.  Given lowered section 179 depreciation limits in 2014 and the abolishment of bonus depreciation, business owners will want to consider having a capitalization policy in place by January 1, 2014.  In addition, some potential tax planning strategies are to be aware of invoice amounts and the capitalization thresholds.  As an example for businesses at the $500 threshold, if it were purchasing an asset that costs $800 and has control, it may want to have it broken down in two invoices.  One would be a down payment of$400 and then the second payment at pickup for $400.  You could expense the whole item as long as there are two different invoices below $500.