When you acquire tangible property to use in your business, you have to determine whether the costs should be expensed or capitalized. You probably prefer expensing so you can deduct the entire cost in the year of purchase. Otherwise, you’d need to capitalize the costs, meaning you’d get a partial deduction in the first year, with the balance written off over the property’s remaining life.
Rules for Expensing Tangible Property on Your Taxes
In 2013, the IRS issued regulations clarifying when tangible real and personal business property can be expensed. The regulations provide safe harbors that let you deduct certain costs you’d otherwise have to capitalize. For example, using a “de minimis” safe harbor, you can elect to deduct individual capital expenditures of $5,000 or less, provided your business treats the costs as expenses on your “applicable financial statements” in accordance with your written accounting procedures. (In general, an applicable financial statement is a financial statement based on a certified audit by an accounting firm.)
What if you don’t have an applicable financial statement? In that case, under the original rules, the de minimis safe harbor was $500 per invoice or item. Now, effective beginning with 2016 taxable years, the safe harbor has increased to $2,500 per invoice or item. In addition, the IRS says it will not contest similar treatment in audits of earlier years.
If you want to use the de minimis safe harbor, you’ll need to attach a statement to your federal income tax return for the year you purchased the items you want to expense. You’ll file the statement annually. In addition, it’s a good idea to update and maintain accounting procedures that spell out how your business treats the cost of tangible property.