Category Archives: Accounting

Do you have a Capitalization Policy?

In an attempt to alleviate past confusion, the IRS issued new regulations clarifying which costs are classified as repairs and maintenance and deductible in the current year. This is versus those fixed asset expenditures that have to be capitalized and depreciated over a number of years.

General Rule: Taxpayer must capitalize and depreciate all costs that facilitate the acquisition or production of property. Improvements to property that better a unit of property, restore it, or adopt it to a new and different use must also be capitalized.

The regulations provide circumstances for when certain items can be expensed, rather than capitalized.

  1. De Minimis Safe Harbor: Supplies and Materials that are $200 or less per item, per invoice OR have a useful life of 12 months or less can be expensed in the current year.
  2. Routine Maintenance Safe Harbor: Repairs and maintenance that keep business property in ordinarily efficient operating condition, such as inspection, cleaning, testing, and replacement of worn or damaged part can be expensed.
  3. Per Building Safe Harbor for Small Businesses: Taxpayers with average annual gross receipts of $10 million or less in the three preceding tax years can deduct improvements made to a building with an unadjusted basis of $1 million or less. The deduction is limited to $10,000 or 2% of the building’s unadjusted basis. This election is made annually on a timely filed return and is on a building-by-building basis.

Exceptions to the General Rule:

  1. A Capitalization Policy establishes the threshold (minimum cost) for capitalization and depreciation of fixed assets. Taxpayers that have a written policy for accounting procedures in place by the beginning of the tax year can deduct up to $500 per item, per invoice (instead of $200). The $500 de minimis safe harbor election can be made by attaching a statement to a timely filed federal income tax return. This election is not considered a Change in Accounting Method and therefore Form 3115, Application for Change in Accounting Method, is not required. For businesses that had a written Capitalization Policy in place at 1/1/2014, the $500 threshold can be applied on the 2014 Federal return. For businesses that did NOT have a policy in place can still make the election for 2015 by establishing accounting procedures for the 2015 tax year before January 1st.
  2. The IRS has hinted at flexibility in the dollar ceilings where the taxpayer has the burden of showing that such treatment clearly reflects income. If you think your business model can support a higher de minimis threshold, consider filing Form 3115, Application for Change in Accounting Method, with the tax return for the year the change is to be effective.

These regulations are lengthy and complex, so contact your local Padgett office for assistance, as these new provisions will affect every business, even yours!

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

The Gift of Inventory – Maximize Your Tax Deduction

Donating excess or obsolete inventory can help small businesses avoid hefty storage fees and make room in their warehouse for the products which do sell. Small business owners could also receive a valuable tax deduction if the donation meets certain requirements.

  • What can be donated? Obsolete inventory exists when the items are no longer in season/style, have expired, or are outdated for the purposes of your business. To qualify for a tax deduction, it must still retain some value and must be able to be used by the charitable organization. A computer is an example for which you can receive a tax deduction. However, the donation of a typewriter to a charitable organization will unlikely qualify for the tax deduction.
  • How much can you donate? The IRS encourages businesses to donate excess inventory to charity in quantities that can be used in the charitable organization’s normal course of business and help them to meet the stated mission of their organization. For example, a manufacturing business can’t receive a deduction for donating 200 widgets to the Salvation Army since they provide no benefit to the charity. However, a clothing store donating 200 coats to Salvation Army would receive a charitable deduction. What if there were 1,000 coats? To receive a deduction for all 1,000 coats, the Salvation Army would have to be able to sell these in the normal course of business, otherwise a deduction would be allowed for only a reasonable number of donated coats.
  • Who can you donate to? Only charitable organizations that are listed as 501(c)(3) organizations will qualify for the tax deduction. Schools, hospitals and churches are some examples of these types of organizations. If you’re in doubt, you can ask the charity about its status.
  • How much can you deduct? The amount you can deduct is the smaller of its fair market value on the day you contributed it or its basis. The basis of contributed inventory is any cost incurred for the inventory. You must remove the amount of your charitable contribution deduction from your opening inventory, as it is not part of the cost of goods sold. If the cost of donated inventory is not included in your opening inventory, the inventory’s basis is zero and you cannot claim a charitable contribution deduction.

If your small business has excess inventory, contact your local Padgett office to see how you may benefit from making a donation.

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.