If you purchase an equipment or furniture and fixture for your business, you may expect to capitalize it as fixed assets which are subject to depreciate over 5 years in your books.
This is a correct practice, but do you know you can now choose to write off in the first year in your books if the item is less than $2,500?
The write off is at your books level, it is unlike section 179 because there is no limit.
Please click here to understand more about this rule if you are not aware of this change effective January 1, 2016.
After you know this rule, you still need to know how to implement it.
Unfortunately it is not an automatic election. It requires you to elect it annually in the tax returns. I am writing to assist you to implement it. You can simply follow the following steps:
1. Consistency
If you want to adopt this threshold of $2,500, you need to expense all items under $2,500 in your books. You can’t capitalize some to fixed assets but then writing off others.
2. Accounting Policy
You are required to document this in writing to adopt this accounting policy. If you are running your business as corporation, I recommend you write it in your minute. The wordings could be as simple as stating the Company will expense, for both books and tax purposes, any item equal or less than $2,500. Such item is either per invoice amount or per item listed in invoice.
3. Election in tax returns
Ensure your tax return attaches an election page. The election wording is like this:
Taxpayer hereby elects under Reg. Section 1.263(a)-1(f) de minimis safe harbor expensing of up to $2,500.
4. Keep all the purchase invoices
The last but not least, substantiate the expenses by the invoices which should show per invoice or per item in invoice less than $2,500. Keep the invoices for at least 5 years.
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