THANK YOU to our business associate, Kim Fichera, CPA in Carlsbad, CA for sending along a “clearer” (as clear as tax laws ever get for most of us) explanation of when to expense a purchase of materials and supplies and when they must be capitalized!
Do you plan to make any significant purchases of assets for your business this year? Assets like computers, furniture and fixtures, manufacturing equipment or buildings? The IRS has released the new tangible property regulations.
First, you need to put a Capitalization Write Off Policy in place. If you have one in place as of January 1st, 2014, the rules go like this:
If your business has Audited Financial Statements (and the above mentioned write-off policy) you can expense, rather than capitalize and depreciate, $5,000 per item.
If your business doe NOT have audited Financial Statements, but you do have a write-off policy in place, you can expense , rather than capitalize and depreciate, $500 per item.
If your business doe NOT have a write-off policy in place, the limit is $200 per item and everything else must be capitalized.
Materials and supplies are tangible property that is used or consumed in the business (think office supplies) and is:
- a component purchased to maintain, repair or improve a tangible property (think toner cartridges or a new hard drive)
- a unit of property with a useful life of 12 months or less; or
- a unit of property costing $200 or less
Materials and supplies can be expensed in the year first used (so don’t buy stuff and delay using it!)
Repairs and Improvements are a tricky category! If you need to replace a broken door know, no problem . . . but almost anything else, you need to speak to your tax advisor!! Or give Kim a call 😉