Immediate Action Required: Updating Your Capitalization Policy

Dec 17, 2015

During 2015, you have more than likely been following a “capitalization policy” for purchasing fixed assets, computers, equipment etc. Under such policy, you immediately deduct some purchases and capitalize others. The limit which you are able to immediately deduct purchases (de minimis safe harbor limitation) has now been increased from $500 to $2,500 for costs incurred during taxable years beginning on or after January 1, 2016. This requires you to increase your Accounting Policy’s stated dollar threshold to the $2500. Act now because as of January 1, 2016, you’re required by law to have accounting procedures in place with regard to expenses: (1) Amounts paid for property costing less than a specified dollar amount ($2,500); or (2) Amounts paid for property with an economic useful life of 12 months or less.

We recommend you make certain your policy is written and you update the dollar amount stated to $2,500. If you find you do not currently have a written policy, take the time to develop one by December 31, 2015, which states “…assets with lives that extends beyond one year and have a cost of more than $2500 are capitalized and depreciated throughout their useful lives.” You can use an amount in excess of the $2500 de minimis safe harbor in your policy, however, you will then absorb the burden of showing such treatment ‘clearly reflects income.’

Also note, taxpayers with an applicable financial statement (AFS), may expense amounts paid for tangible property up to $5,000. For those taxpayers without an AFS, the threshold is $2,500.

Now is the time to review or adopt a formal capitalization policy. Take action before year-end! If you have any questions or would like additional information please contact your William Vaughan Company professional.

Categories: Healthcare & Dentistry