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De Minimis Safe Harbor Expensing


This past September, in an attempt to provide clarity to taxpayers, the government issued final regulations that address whether an expense should be capitalized or deducted. These final regulations will affect the way companies in all industries treat costs for acquiring, maintaining, producing, repairing, and replacing tangible property.

The regulations take effect 1/1/2014; however, taxpayers may elect to retroactively apply them to 1/1/2012.

In order to ease the burden of deciding when to capitalize and when to expense an item, the final regulations include a De Minimis Safe Harbor Election that allows taxpayers to expense all items under a certain dollar amount. There are two main questions that every business needs to ask itself with regard to the De Minimis Safe Harbor Election.

1. What types of financial statements do you have?
2. Do you have a written accounting procedure in place?

Type of Financial Statements

The final regulations break financial statements issued by the taxpayer into two categories, Applicable Financial Statements (AFS) and non-applicable financial statements.

AFS are financial statements that are (1) filed with the SEC, (2) certified, audited financial statements, or (3) other financial statements provided to a state or federal government agency. All other financial statements that do not fall within the definitions above are considered non-applicable financial statements.

Taxpayers with AFS are allowed to expense all items that cost up to $5,000. For taxpayers without AFS, the per-item limitation is $500.

Written Accounting Procedure

In order to take advantage De Minimis Safe Harbor Election, taxpayers must have a written accounting policy in place at the beginning of the tax year that allows the company to expense all items under a certain amount for financial accounting purposes. If your company does not have such a policy in place, it’s critical that one is implemented by January 1st of 2014.

If you have any questions about the repair regulations, the De Minimis Safe Harbor Election, or asset capitalization, please contact a Berntson Porter tax advisor at (425) 454-7990.