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Property And Equipment Changes Loom In The New Year

by Josh Weiss, CPA/ABV Shareholder, LUTZ

Capitalization Requirements
Recently, the IRS issued long-awaited guidance that was intended to clarify the appropriate tax treatment for items surrounding capitalization of fixed assets. In many instances, prior guidance was unclear with regard to when certain expenditures were required to be capitalized versus expensed (perhaps as repairs and maintenance). Effective for tax years beginning on or after JANUARY 1, 2014, this new guidance provides the opportunity for tax elections to be made that would adopt a safe harbor method, allowing taxpayers to expense items below the dollar amount thresholds included in the elections.

  • For taxpayers with an applicable financial statement (i.e., certified audited financials or financials reported annually to a Federal or state regulatory body), the safe harbor is $5,000 per invoice or per invoice item.
  • For taxpayers without an applicable financial statement, the safe harbor is $500 per invoice or per invoice item.

In order for taxpayers to adopt one of these safe harbor methods, they must have a formally-adopted capitalization policy in place by the end of the prior taxable year. For calendar-year taxpayers, this means that a capitalization policy must be adopted by DECEMBER 31, 2013. Additional provisions in the recently-released guidance also include:

  • Elections with regard to expensing general repairs and maintenance for taxpayers beneath certain revenue thresholds.
  • Guidance pertaining to potential capitalization of improvements to real estate.

These changes will have a prevalent impact on the construction industry. A greater analysis of the small tools as well as the repairs accounts will be necessary. Adoption of one of the safe harbor policies and formalization of the capitalization policy will be critical in the coming year.

Depreciation Limits
For the past couple of years, the IRS has allowed for accelerated depreciation for capitalized property and equipment. This includes Section 179 depreciation, which allows for immediate write off or depreciation of property and equipment up to $500,000. It also includes bonus depreciation for new property and equipment, which allows for a 50% write off of the cost of the equipment. Both of the provisions have allowed for the acquisition of equipment with an immediate tax benefit.

These provisions are set to change dramatically in 2014. As it currently stands, bonus depreciation will not be available in 2014. Section 179 depreciation will be reduced to a $25,000 maximum. These changes stand to impact many in the construction industry due to the heavy equipment often utilized. It should be noted that the provisions that are in place for 2013 were not signed into law until January of 2013. While it remains possible that an extension of the 2013 provisions could be is possible, however at this time there is indication of an extension of the provisions. Therefore, it may benefit your company to utilize the accelerated depreciation provisions for 2013 to add equipment and still take advantage of the tax benefit.

It is important to consult your tax professional to ensure that you have evaluated and implemented a proper capitalization policy and also have taken advantage of the current depreciation provisions in play for the last few weeks of 2013.