The IRS has recently released new income tax regulations with regard to the acquisition or production of tangible property, such as furniture, equipment, etc., as well as materials and supplies. The regulations take effect January 1, 2014. One of the main changes is a de minimis safe harbor that will allow electing taxpayers to claim a deduction in the year of acquisition or production of such items, that cost up to $500 each, or have an economic useful life of 12 months or less. This could provide a significant tax advantage when you consider that, with few exceptions, such items must ordinarily be depreciated over 5 or more years, or in the case of non-incidental material and supplies, maintained in inventory. The election applies to all qualifying property.
In order to use the $500 rule, the company must:
- Have a written accounting policy in place by January 1, 2014, requiring the expensing of such items;
- Expense these items for regular accounting and financial statement purposes, as well as for tax purposes; and
- Include an election statement in the tax return each year.
Also, the $500 allowance for each item can be increased to $5,000 if the company’s financial statements are audited or are submitted to the federal or state government for a non-tax purpose.