Should my business expense or capitalize? As with many regulations in taxation the answer is, “it depends.” In March of 2008, the IRS proposed regulations that provide a de minimis rule that permits “small cost” items to be exempt from capitalization. What is considered a small cost item is relative to each business. According to the IRS definition of de minimis, small cost items would include items that have so little value (in comparison to the company in its entirety) that accounting for them would be unreasonable or administratively impractical.
Generally, the first step in determining what a business will consider a “small cost,” is to write a company policy that describes guidelines for classifying expenditures. While compiling a policy, a company should consider the type of property (tangible or intangible? is it an improvement?), the life of the property (greater than one year?), and also the cost of the property (is it material to the company’s bottom line?).
Since the IRS does not provide black and white guidelines for classifying expenditures, a company can substantiate their actions by implementing and consistently applying a capitalization policy. Levin Swedler & Company – Certified Public Accountants can answer questions regarding fixed asset acquisitions, disposals, and depreciation classification, along with the rules under federal and state law related to the availability of bonus depreciation on newly capitalized assets.
Keep an eye out for my next blog post that will touch on specific frequently asked quentions regarding the capitalization of expenditures.
Written By: Matthew Migal