Capitalization Regulations

1/22/2016

 

Dear Clients:

  

Over the last several years, the IRS has been modifying the capitalization regulations which impacts whether purchases are expensed or capitalized.

 

For Years starting Year 2016 and after, the IRS has changed the threshold for the cost of each individual item from $ 500 to $ 2,500, only if the company has an accounting policy in effect at the beginning of the year stating that the company adopts $ 2,500 as the threshold amount.

 

 

Below is the IRS's announcement for the change in the allowed threshold amount.

 https://www.irs.gov/uac/Newsroom/For-Small-Businesses-IRS-Raises-Tangible-Property-Expensing-Threshold-to-$2,500-Simplifies-Filing-and-Recordkeeping

   

As a result I have attached to this email an accounting policy that you should sign at the beginning of Year 2016 to adopt the new policy, and that you should keep in your records for each business or rental you operate.

 

Also, if you are an accounting and tax client of DeLano Consulting, CPA LLP, please also send us a copy of the signed accounting policy either now, or when you send us your accounting information for Year 2015, so we can include the adopted policy in our files for next year.

 

The accounting policy does not need to be filed with the IRS or anywhere else.

 

This change in the threshold amount is a major development that affects all businesses small and large. In the past the IRS never provided a threshold amount for capitalization, and when the IRS recently started to provide a threshold amount, the IRS started at $ 100 per item, went to $ 500 in the last few years, and now has adopted starting in Year 2016, a threshold of $ 2,500. 

 

The end result of the policy change is starting Year 2016, more purchases can be deducted as expense in the year placed in service, especially if you have been using a lower threshold amount than $ 2,500.

 

So instead of having to spread the cost of purchases below the threshold over 3 to 39 years, depending on the asset class life of the asset, the purchase can be deducted in the year placed in service, which can increase expenses and reduce taxes in the year of purchase. This can be significant, depending on the number of purchases you have, below your old and the new threshold amount of $ 2,500.

 

Let me know if you have any questions.

 

 

 

 

Wendell DeLano, CPA