At the end of 2013, the IRS published guidance designed to help answer a question you probably consider whenever you acquire a business asset: Should you depreciate the cost over time or expense it currently?
The new guidance, referred to as capitalization and repair regulations, explains the federal income tax treatment of expenditures you make for materials and supplies, repairs and maintenance, and business property you buy, produce, or improve.
The regulations apply to all businesses, including sole proprietorships, rentals, and farms, and are generally effective beginning January 1, 2014. However, the rules may also affect your prior- and current-year tax returns. Here’s what you need to do.
- Set up procedures. Written accounting policies detailing the method and reason for classification of asset purchases will help make sure you benefit from expensing elections available in the regulations.
- Review past decisions. Look over your depreciation schedule, as well as your general ledger for past years. Make sure decisions regarding the expensing or capitalization of assets conform to the new requirements.
- File necessary forms. If you determine some assets should have been treated differently under the new rules, you may need to amend prior year returns or file “Form 3115, Application for Change in Accounting Method.”
Please give us a call to discuss how the capitalization and repair regulations will affect your business.