Business owners know that just about every expense translates into a tax write-off. But the when and how for a particular expense can be confusing.
An immediate deduction is allowed for the cost of materials and supplies, but what about items that don’t fit in this category? Usually, the cost of any item with a life of more than one year must be capitalized and recovered through depreciation (or first-year expensing if applicable).
However, under regulations issued in 2013, small businesses may rely on some simplified options to write off their costs. Unfortunately, the rules for these simplified options aren’t so simple.
The IRS recently released a Fact Sheet on the tangible property regulations to help, but it only goes so far. I’ll try to simplify where I can.
De minimis safe harbor election
You can elect to apply a de minimis safe harbor to amounts paid to acquire or produce tangible property to the extent such amounts are deducted by you for financial accounting purposes or in keeping your books and records.
If you have an applicable financial statement (AFS), such as an SEC filing (which no small business that I know of has), you may use this safe harbor to deduct amounts paid for tangible property up to $5,000 per invoice or item. If, as is the case for small businesses, you don’t have an AFS, you may use the safe harbor to deduct amounts up to $500 per item or invoice
An annual election is not a change in method of accounting, so no special IRS form is required. However, you must still make the election by attaching a statement titled “Section 1.263(a)-1(f) de minimis safe harbor election” to the timely filed original federal tax return including extensions for the taxable year in which the de minimis amounts are paid.
Materials and supplies
Basic rules for deducting materials and supplies, which are tangible, non-inventory property used and consumed in your operations, are unchanged. However, the regulations provide some additional write-off options.
If you want to use these options, you may need to file for a change in accounting method.
As I said at the outset, the rules are very complicated and this isn’t a do-it-yourself activity.
You can find some clarity on your own in the IRS’s FAQs on these regulations, including the simplified options. Then discuss your business activities with your CPA to determine whether any of these options should be used and what steps you need to take to do so.