ALERT: ACTION NEEDED BY DECEMBER 31, 2013

Your business may need to adopt a written accounting policy by December 31, 2013

This is the second in a number of articles that discusses the new repair and maintenance regulations, which are effective January 1, 2014. This article summarizes the new safe harbor regulations for deducting de minimis amounts spent on the purchase of property used in your business (other than inventory).

The safe harbor de minimis rules provide your business a tax opportunity to deduct, instead of capitalize, smaller equipment and machinery purchases. However, the rules differ depending on whether your business has an “Applicable Financial Statement” or not, as follows:

If your business has an Applicable Financial Statement (AFS):
To apply the de minimis safe harbor rules your business must:
1. Prior to the beginning of the year, adopt a written accounting policy to expense amounts paid for:
o Property costing less than a specified dollar amount;
o Property with an economic useful life of 12 months or less.
2. Specify a dollar amount that does not exceed $5,000 per invoice or per item.
3. Expense the amount on your applicable financial statement.
4. Attach an annual safe harbor election to your timely filed federal income tax return.

An AFS is a:
• Certified audited financial statement
• Financial statement required to be filed with Securities and Exchange Commission
• Financial statement required to be provided to the federal or state government or agency

Example: Opportunity, Inc. adopted a written accounting policy on January 1, 2014 to expense amounts paid for property costing $5,000 or less; and has a certified audited financial statement completed for calendar year 2014. Opportunity pays $30,000 to purchase 6 computers costing $5,000 each for use in its operations, and expenses the $30,000 on its books. Opportunity may elect on its federal income tax return filed for 2014 to deduct the $30,000.

If your business does not have an Applicable Financial Statement:
To apply the de minimis safe harbor rules your business must:
1. Prior to the beginning of the year, adopt an accounting procedure to expense amounts paid for:
o Property costing less than a specified dollar amount;
o Property with an economic useful life of 12 months or less.
2. Specify a dollar amount that does not exceed $500 per invoice or per item.
3. Expense the amount on your books.
4. Attach an annual safe harbor election to your timely filed federal income tax return.

For additional information regarding these rules, please contact The Whitlock Company.

Written by Kevin P. Hogan, CPA, CMA