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Tangible Property Rules: Who should care?

Anyone who’s taken a course in accounting, has come across the question on whether to capitalize or to expense and what it means exactly to make that decision under either approach. Purchasing equipment can be classified as an asset to be amortized over the term of various years or as an expense in the current period. Up to now, the rules on when to take either approach had not provided a clear set of uniform guidelines and conservative accountants, with more flexibility under the old rules, made that decision on a case-by-case basis. As long as they had the facts to support their position and were consistent with their reporting method for that client, there was no reason to expect an issue with the IRS.

Somewhere along the way it became an area for potential abuse and the need arose to create uniform guidelines. Those guidelines address the following three areas:

  1. Application of the De minimis rule

  2. Tax implications of Dispositions

  3. Safe Harbor for Routine Maintenance

One interpretation of these rules is to begin by assuming that all expenditures are an asset and, through the process of elimination, arrive at a final decision. To those whom these rules should matter the most, the new rules are probably not very relevant because one such exception to the requirement of capitalization is that financial statements are kept in such a way that policies and procedures to produce said financial statements are also those that are to be applied for tax reporting purposes. If you were wondering if you had been recording these expenditures correctly all along, that’s the answer to your prayers.

The other exceptions are that the expenditure fall within either of the following:

  • 0.1 % of gross receipts,

  • 2 % of depreciation and amortization expense,

  • Inventory,

  • Land, or

  • Routine maintenance

The new rules on disposition have to do with changes to the classification of asset groups and that’s a whole other story.

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