Tangible Property Regulations: Should you Capitalize or Expense?

The IRS says a lot about how you account for what you spend on tangible property. The part that isn’t so fun is that in the day-to-day life of running your business, many of the expenditures you make often seem alike. When it’s time to file your quarterly taxes, you will need to review what the current rules are with an experienced tax professional. You can expect to make at least some accounting code updates in the quarterly or yearly tax cycle, whether an expenditure should be capitalized or deducted, whichever the case may be. The first check you will want to consider is whether the property you bought last year was a new build or pre-existing structure. If it is a newly built structure, IRS rules stipulate that any expenses you have are to be costs that are capitalized.

Most people buy buildings or homes from another owner. In this scenario, capitalization or expensing becomes a bit more involved, but that’s okay. We will delve into additional checks so that you will have a general idea of what to expect to report on your business statements for tangible property regulations.

Cost to acquire a tangible property

Before you make that next big purchase, you should think about the tangible property that you already own. A few questions that you could ask your tax advisor are:

• How much are my taxes projected to increase overall if I buy a new property?
• Can the age of the new property purchase make a difference in my tax bill?
• Does a partnership ownership of tangible property make a difference?
• Are some tangible property types more advantageous than others in terms of the potential to generate new revenue along with applicable deductions?

Whenever most people get ready to make a purchase, they focus on terms of the sticker price. However, you might be better off with a higher price tag in terms of capitalizing expenses. Looking at deductions alone doesn’t give you a full picture of what your options are in terms of making capital investments in property. A little bit of tax analysis will help you to make that call. When you already own a property, you could be missing out or improperly expensing direct or indirect costs.

A lot of these decisions aren’t always “cut and dry.” You could look at case laws and IRS rules which effectively “piecemeal” what proper tax treatments are only after new situations arise in business.

Set a budget to capitalize initial costs

Whether you purchase a new tangible property or a pre-existing one, it is a capital cost. However, costs related to structural maintenance on pre-owned structures generally fall into the category of deductible expenses. Adding an HVAC or an additional dwelling unit (ADU) is capitalized, whereas paint, supplies, and labor are types of expenses which are deductible costs. When you purchase a new property, most of the initial expenses that you incur should be capitalized. Operating expenses on new tangible property are deductible, just like pre-existing structures. If you visit the IRS website, you can also find resources better to understand the differences between direct and indirect costs.

Determine fixed/recurring operating expenses

Review your fixed operating expenses for the tangible property you own already or estimate what your regular monthly expenses will be for your new property. Set an operations budget. Categorize the deductible expenses and separate any non-deductible ones. Be sure to also account for both direct and indirect cost deductions in your projections.

Planning for capital projects

Let’s say you want to plan to expand your property in the future. Perhaps you want to schedule improvements, or make upgrades. It’s a good idea to think about the tax impact of what those changes can mean. Regulations called final tangibles might apply. One example: you decide to finally finish out the basement in your primary or secondary home. Not only should you check what needs to be brought up to code, the newly expanded square footage may cause your property taxes to increase. Maximize how much you can offset the new municipal tax payments by having a professional sort through every possible deduction and capitalized cost. Don’t be caught by surprise once the inspector leaves, and you receive a new tax assessment!

Capitalize or deduct non-recurring expenses

Every business and homeowner experiences major expenses unexpectedly. These fall into the category of extraordinary expenses, while planned expenses are non-recurring. Any planned, non-recurring expenses fall under a separate column. How you manage those non-recurring and ex expenses are very important to file your taxes correctly. Some non-recurring expenses will be capitalized, while others will qualify as tax deductions.

The de minimus safe harbor election

Every business must spend small amounts of money. Some you might consider a non-material expense. However, over time these small expenses do add up. But, is it worth the time tracking and documenting receipts for them?

The IRS introduced a solution for this common scenario called the de minimus safe harbor election. De minimus safe harbor is a tangible property regulation that allows owners to apply a single line item deduction with or without a financial statement. The IRS stipulates that you may deduct up to $5,000 per invoiced item for your tangible property. Without an applicable financial statement (AFS), you may deduct a $2,500 maximum per invoice. You may not need to break out multiple items on an invoice to calculate this section of your tax form, which will save you some energy and time. You will get more use out of this provision when you purchase tangible property for resale than when you construct a new building or house.

Choose a tax advisor today

Anyone will tell you that taxes are involved. It seems like business or property owners always have to walk the thin line of remaining compliant with regulations and maximizing the net profits for tangible property operations. Firms like SD Mayer work with owners like yourself to ensure that you are thoroughly prepared at tax time. They remain current on legislative measures and will walk you through every step of your tax process.

SD Mayer knows that when it comes to issues like tangible property regulations, people need finance professionals with a lot of expertise. Whatever your specific needs, we can help you connect with a tax advisor who has just the right combination of skills, certifications, and experience to help you meet all of your financial goals. Contact us today to get started.

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