We covered the importance of fixed asset auditing and fixed asset depreciation on two previous blog posts. You can read about fixed asset audit here and fixed asset depreciation here. On this post, we will go over fixed asset regulation that impacts how you capitalize and expense your fixed assets. The regulation came into effect on January 1st 2014 and it affects every business sector.
These regulations, contain a complex framework of rules which must be applied to determine if costs incurred in acquiring, maintaining, repairing, and improving tangible and real property must be capitalized or deducted.
ACQUISITION OF PROPERTY & MATERIALS AND SUPPLIES
Acquisition of Property – De minimis Safe Harbor
The regulations include a safe harbor de minimis rule allowing a deduction for costs incurred to acquire property that would otherwise be required to be capitalized. The threshold for this provision is $500 per item.
The $500 limit is an all-or-nothing limit. If the invoice total (or the per item cost) exceeds the applicable limit then no portion is deductible under this safe-harbor provision. In a taxpayer friendly move, the regulations make it clear that additional costs such as delivery fees, installation services, etc. do not have to be considered in the $500 limit if these costs are not included on the same invoice as the acquired property. Accordingly, it may be beneficial to request vendors to separately bill for those charges.
Materials and Supplies
Materials and supplies are defined as tangible property that is used or consumed in the taxpayer’s business, that is not inventory, and that is:
- A component acquired to maintain, repair, or improve a fixed asset
- A fixed asset that has an economic useful life of 12 months or less
- A fixed asset having an acquisition or production cost of $200 or less
Items that meet one of these criteria can be deducted in the year in which the company first uses them. If they are not used in the year purchased, the cost must be capitalized until they are used. If, however, a business elects to apply the de minimis safe harbor rule discussed above, they must also apply it to amounts paid for materials and supplies. This means that a business would be able to expense amounts paid for materials and supplies even though they have not yet been used.
REPAIRS AND IMPROVEMENTS
With regards to amounts spent to repair or improve property, taxpayers generally must capitalize costs that result in: a betterment to the unit of property, a restoration of the unit of property, or an adaptation of the unit of property to a new or different use. While these concepts have always been part of the tax code, the focus of the IRS, through these regulations, is to eliminate some of the subjectivity surrounding this issue by making it clearer that capitalization will be required in many cases.
In determining whether expenditure should be capitalized or expensed, the “unit of property” concept is significant. This new partitioning of a building structure into these smaller components may cause what previously was considered a deductible repair to now being treated as a capital expenditure since the work performed relative to that smaller component is more likely to constitute a significant improvement to the component. Unfortunately, there are no clear tests to determine what constitutes a repair versus a betterment, restoration or adaptation.
In sum, IRS regulations are still murky and a source of worry and frustration to many business owners. One way to streamline how your business prepares for tax season is to have an organized and current record of all your fixed assets. A fixed asset tracking system that allows users to not only track their fixed assets, but also to track a complete history that includes repair and maintenance records is fundamental when filling taxes. Asset Panda provides a platform where your fixed assets are tracked, managed, and supported in one place. Our asset tracking system allows users unlimited customization. You can customize your repair action to include information such as cost of repair, date requested and date performed, type of repair, person requesting repair, person that provides service, just to name a few. The system also sends notifications to email addresses, in app notifications or on the notification panel. Use Asset Panda to gather extensive information on your fixed assets and be prepared every time for tax season.