De Minimus Can Be Maximus under the New Tangible Property Regulations

By:
James J. Wienclaw, CPA
Published Date:
Nov 1, 2014

So much has been written on the tangible property regulations during their evolution from proposed standards to final regulations, and even the CPA community has been outspoken with regard to these regulations. Still, many taxpayers are paying less attention than expected to them, perhaps because the lengthy implementation delays left some taxpayers taking a wait-and-see approach. Nonetheless, these regulations are effective for tax years beginning in 2014. Although the final regulations contain some implementation and compliance complexities, other provisions have evolved in a more taxpayer-friendly manner. One such provision is the de minimis safe harbor expensing election.

As practitioners, we routinely walk through the client ritual of determining which items of tangible property can be expensed versus capitalized for tax purposes. These were easier discussions when 50% and 100% bonus depreciation elections were available, along with a potential $500,000 expensing election under IRC section 179. As of this writing, both provisions have been essentially eliminated or substantially scaled back, making the discussion of expense versus capitalize more formative. Whether they will be restored remains a pending question; however, restoration can only enhance potential tax benefits when used in conjunction with the de minimis safe harbor expensing election for tangible property purchases.


Learn more about the new Tangible Property Regulations and what actions to take on your clients’ 2014 tax returns at the upcoming full day NYSSCPA C Corporations Tax Conference, Jan. 28, 2015, at the FAE Learning Center, 14 Wall Street. Register for in-person or live video webcast. Find out more here.

The Safe Harbor Expensing Provision

This election allows taxpayers to deduct as period costs expenses incurred to acquire or produce what the regulations call a “unit of property“ (UOP) that would generally be capitalized for tax purposes. The regulations state that where a taxpayer meets the requirements of the election and the books treat the UOP as a period cost, the same UOP may be expensed for tax purposes, up to certain limits addressed below. This book-tax conformity rule is a prerequisite for accelerated expensing under the de minimus rule. There are two key concepts that require further discussion. First, does the taxpayer issue an applicable financial statement (AFS)? Second, what is the definition of a UOP?

What is an Applicable Financial Statement (AFS)?

The regulations clearly define an AFS leaving little to interpretation to the practitioner. It is—

  • a financial statement required to be filed with the SEC;
  • a certified audited financial statement issued by an independent CPA; or
  • a financial statement required to be provided to a Federal or a state government or agency other than the SEC.

Where a taxpayer has an AFS, the maximum that may be expensed for each UOP is $5,000. Where there is no AFS, the maximum that may be expensed per UOP is $500.

What is a unit of property UOP?

Generally, for purposes of the de minimus safe harbor, a UOP is property, material, or supply acquired or produced where—

1) the taxpayer has, at the beginning of the year, a written accounting policy that treats for book purposes amounts paid for property costing up to a predetermined dollar limit as a current expense (book-tax conformity requirement);
2) amount paid for property is expensed in a AFS or on the books and records if no AFS exists in accordance with the written accounting policy; and
3) the cost incurred per UOP is not more than $5,000 if the taxpayer has an AFS and not more than $500 otherwise.

Looking at the above, it’s apparent how important it is to properly identify a UOP to best maximize the benefits under the safe harbor. For example, the regulations will allow a taxpayer with an AFS that acquires 50 computers costing $1,000 per computer, 50 printers costing $500 per printer ($75,000 in total) to expense up to the full $75,000 if items 1 through 3 above are satisfied, along with the proper tax returns election as further discussed below. In addition, the taxpayer may still have the IRC section 179 expense election available.

Where UOP thresholds exceed the $5,000 or $500 limits, the entire cost should be capitalized but may be eligible for full or partial expensing under IRC section 179. In addition, taxpayers should closely review whether a UOP requires capitalization as part of a larger improvement or self-constructed asset.

The $5,000 threshold where an AFS exists should benefit a significant number of taxpayers. Conversely, the $500 limitation seems to fall short in light of the liberal amounts allowed taxpayers with an AFS. Not all taxpayer situations require an AFS. So why should a company that maintains its books using advanced accounting system not requiring an AFS be subject to a nominal limitation? 

Regardless, there’s no limitation to the amounts that may be expensed under these provisions when staying within the above parameters. Therefore, it’s very important for taxpayers to review accounting policies and insert necessary procedures to properly segment tangible property purchases recorded in the books.

The De Minimus Safe Harbor Election

Taxpayers should make the election with a timely filed income tax return, including extensions, designating the expensing threshold up to allowed thresholds per UOP for the current year. The election is irrevocable and is made annually, and the expense threshold may be changed year-to-year. Once made, however, the election must be applied consistently to all assets specific to a tax year. In addition, consolidated groups are permitted to make elections specific to subsidiaries subject to the same guidelines.

In addition, an election will not be deemed a change in accounting method; thus, no IRS approval is required. For taxpayers that do not include an election in its return, the capitalization rules in the final regulations will apply.

Additional Considerations

Whether or not bonus depreciation is reinstated or the IRC section 179 expensing provision are increased, it’s important both practitioners and taxpayers are completely aware of the tax benefits related to the de minimus expensing provisions above. As such, the following should be considered:

  • Is accelerated expensing is the best option? (Expiring tax attributes and effective tax rate changes could impact this decision.)
  • Make sure written accounting policies with expensing thresholds are in place to support the book-tax conformity requirement.
  • Analyze vendor invoices confirming that the requisite information is provided to properly identify UOP to maximize current tax benefits; take corrective measures if needed.
  • Maintain a system to properly record and segment property purchases into expense versus capitalization.
  • Always assume this issue will be examined under audit and proceed with good practices.

It might be best to assume that the generous bonus depreciation we’ve become accustomed to will not get reinstated and that the IRC section 179 expensing limitation will remain at the reduced 2014 limit of $25,000. Reinstatement or increases to either of these provisions could be a windfall to taxpayers in current tax savings. What better results can we get with immediate expensing for de minimus items and accelerated expensing on remaining tangible asset purchases? As good as this could be, it’s best to assume that we won’t see further enhancements to what we already have.

As such, taxpayers are encouraged to consider taking advantage of the de minimus safe harbor provisions up to the maximum amounts allowed. The above is just one component to the final regulations. The new tangible property regulations are voluminous and users are encouraged to get acquainted with them, as they are broad in applicability and well beyond a survey discussion on the de minimus safe harbor rule.


James J. Wienclaw, CPAJames J. Wienclaw, CPA, is in the Long Island office of Marcum LLP where he serves as practice leader to the Business Enterprise Tax Services group focusing on closely-held business groups. As a tax and business advisor to clients, he implements various tax saving strategies, synergies and process efficiencies in providing federal, state, and local tax consulting and compliance services to these groups. Wienclaw has authored numerous articles on corporate taxation for various professional publications. He is also the chair of the NYSSCPA's C Corporations Committee, and is also a member to the AICPA, and The IBO Reliance. He can be reached at 631-414-4544 or James.Wienclaw@marcumllp.com.

 
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