What dollar threshold should my business use before something counts as a fixed asset, and do I have to write the policy down?

Do you have to write the policy down?

For the de minimis safe harbor to apply to a taxpayer under paragraph (f)(1)(i), the taxpayer must have an applicable financial statement as defined in paragraph (f)(4); must have at the beginning of the taxable year written accounting procedures treating as an expense for non-tax purposes amounts paid for property costing less than a specified dollar amount, or amounts paid for property with an economic useful life (as defined in § 1.162–3(c)(4)) of 12 months or less; and must treat the amount paid for the property as an expense on its applicable financial statement in accordance with its written accounting procedures. (jurisdiction: United States (federal income tax; Title 26 of the Code of Federal Regulations, Internal Revenue Service, Department of the Treasury), entity_scope: taxpayers that have an applicable financial statement (as defined in § 1.263(a)–1(f)(4)) and elect the de minimis safe harbor, accounting_basis: United States federal income tax, with the condition referring to the taxpayer's applicable financial statement and its written accounting procedures for non-tax purposes, effective_from: 2014-01-01, conditions: the taxpayer elects to apply the de minimis safe harbor under § 1.263(a)–1(f); the taxpayer has an applicable financial statement as defined in § 1.263(a)–1(f)(4))

“(A) The taxpayer has an applicable financial statement (as defined in paragraph (f)(4) of this section); (B) The taxpayer has at the beginning of the taxable year written accounting procedures treating as an expense for non-tax purposes— (1) Amounts paid for property costing less than a specified dollar amount; or (2) Amounts paid for property with an economic useful life (as defined in § 1.162–3(c)(4)) of 12 months or less; (C) The taxpayer treats the amount paid for the property as an expense on its applicable financial statement in accordance with its written accounting procedures; and”

For the de minimis safe harbor to apply to a taxpayer under paragraph (f)(1)(ii), the taxpayer must not have an applicable financial statement as defined in paragraph (f)(4); must have at the beginning of the taxable year accounting procedures treating as an expense for non-tax purposes amounts paid for property costing less than a specified dollar amount, or amounts paid for property with an economic useful life (as defined in § 1.162–3(c)(4)) of 12 months or less; and must treat the amount paid for the property as an expense on its books and records in accordance with those accounting procedures. (jurisdiction: United States (federal income tax; Title 26 of the Code of Federal Regulations, Internal Revenue Service, Department of the Treasury), entity_scope: taxpayers that do not have an applicable financial statement (as defined in § 1.263(a)–1(f)(4)) and elect the de minimis safe harbor, accounting_basis: United States federal income tax, with the condition referring to the taxpayer's books and records and its accounting procedures for non-tax purposes, effective_from: 2014-01-01, conditions: the taxpayer elects to apply the de minimis safe harbor under § 1.263(a)–1(f); the taxpayer does not have an applicable financial statement as defined in § 1.263(a)–1(f)(4))

“(A) The taxpayer does not have an applicable financial statement (as defined in paragraph (f)(4) of this section); (B) The taxpayer has at the beginning of the taxable year accounting procedures treating as an expense for non-tax purposes— (1) Amounts paid for property costing less than a specified dollar amount; or (2) Amounts paid for property with an economic useful life (as defined in § 1.162–3(c)(4)) of 12 months or less; (C) The taxpayer treats the amount paid for the property as an expense on its books and records in accordance with these accounting procedures; and”

A taxpayer makes the de minimis safe harbor election by attaching a statement to the taxpayer's timely filed original Federal tax return (including extensions) for the taxable year in which the amounts are paid. (jurisdiction: United States (federal income tax; Title 26 of the Code of Federal Regulations, Internal Revenue Service, Department of the Treasury), entity_scope: taxpayers electing the de minimis safe harbor under § 1.263(a)–1(f), accounting_basis: United States federal income tax, effective_from: 2014-01-01, conditions: the taxpayer elects to apply the de minimis safe harbor under § 1.263(a)–1(f))

“A taxpayer makes the election by attaching a statement to the taxpayer’s timely filed original Federal tax return (in- cluding extensions) for the taxable year in which these amounts are paid.”

If the taxpayer's financial results are reported on the applicable financial statement for a group of entities, then for purposes of paragraph (f)(1)(i)(A) the group's applicable financial statement may be treated as the taxpayer's applicable financial statement, and for purposes of paragraphs (f)(1)(i)(B) and (f)(1)(i)(C) the written accounting procedures provided for the group and utilized for the group's applicable financial statement may be treated as the written accounting procedures of the taxpayer. (jurisdiction: United States (federal income tax; Title 26 of the Code of Federal Regulations, Internal Revenue Service, Department of the Treasury), entity_scope: taxpayers whose financial results are reported on the applicable financial statement of a group of entities, accounting_basis: United States federal income tax, effective_from: 2014-01-01, conditions: the taxpayer elects to apply the de minimis safe harbor under § 1.263(a)–1(f))

“If the taxpayer’s financial results are reported on the applicable financial statement (as defined in paragraph (f)(4) of this section) for a group of entities then, for purposes of paragraph (f)(1)(i)(A) of this section, the group’s applicable financial statement may be treated as the applicable financial statement of the taxpayer, and for purposes of paragraphs (f)(1)(i)(B) and (f)(1)(i)(C) of this section, the written accounting procedures provided for the group and utilized for the group’s applicable financial statement may be treated as the written accounting procedures of the taxpayer.”

The election statement must be titled “Section 1.263(a)–1(f) de minimis safe harbor election” and must include the taxpayer's name, address, taxpayer identification number, and a statement that the taxpayer is making the de minimis safe harbor election under § 1.263(a)–1(f). (jurisdiction: United States (federal income tax; Title 26 of the Code of Federal Regulations, Internal Revenue Service, Department of the Treasury), entity_scope: taxpayers electing the de minimis safe harbor under § 1.263(a)–1(f), accounting_basis: United States federal income tax, effective_from: 2014-01-01, conditions: the taxpayer elects to apply the de minimis safe harbor under § 1.263(a)–1(f))

“The statement must be titled ‘‘Section 1.263(a)–1(f) de minimis safe harbor election’’ and include the taxpayer’s name, address, taxpayer identification number, and a statement that the taxpayer is making the de minimis safe harbor election under § 1.263(a)–1(f).”

Partly established. Established: whether a written policy is required (S02); who requires it (S02). Missing: what conditions attach to relying on it.

The amounts you are actually allowed to use, and which one applies to you

For the de minimis safe harbor to apply to a taxpayer with an applicable financial statement, the amount paid for the property must not exceed $5,000 per invoice (or per item as substantiated by the invoice), or such other amount as identified in published guidance in the Federal Register or in the Internal Revenue Bulletin. (jurisdiction: United States (federal income tax; Title 26 of the Code of Federal Regulations, Internal Revenue Service, Department of the Treasury), entity_scope: taxpayers that have an applicable financial statement (as defined in § 1.263(a)–1(f)(4)) and elect the de minimis safe harbor, accounting_basis: United States federal income tax, effective_from: 2014-01-01, conditions: the taxpayer elects to apply the de minimis safe harbor under § 1.263(a)–1(f); the taxpayer has an applicable financial statement as defined in § 1.263(a)–1(f)(4); the stated amount may be changed by published guidance in the Federal Register or the Internal Revenue Bulletin)

“(D) The amount paid for the property does not exceed $5,000 per invoice (or per item as substantiated by the invoice) or other amount as identified in published guidance in the FEDERAL REGISTER or in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter).”

A taxpayer without an AFS may use the de minimis safe harbor to deduct amounts up to $2,500 per invoice or item ($500 for amounts prior to Jan. 1, 2016), as substantiated by invoice. (jurisdiction: United States (federal income tax), entity_scope: taxpayers without an applicable financial statement (AFS), accounting_basis: federal income tax, effective_from: 2016-01-01, conditions: $500 limitation applied prior to Jan. 1, 2016; amount applied per invoice or per item as substantiated by invoice)

“If you don't have an AFS, you may use the safe harbor to deduct amounts up to $2,500 ($500 prior to Jan. 1, 2016) per invoice or item (as substantiated by invoice).”

For purposes of paragraph (f), a taxpayer's applicable financial statement is the taxpayer's financial statement listed in paragraphs (f)(4)(i) through (iii) that has the highest priority, the descending priority being: a financial statement required to be filed with the Securities and Exchange Commission (the 10-K or the Annual Statement to Shareholders); a certified audited financial statement accompanied by the report of an independent certified public accountant (or, for a foreign entity, of a similarly qualified independent professional) used for credit purposes, for reporting to shareholders, partners, or similar persons, or for any other substantial non-tax purpose; and a financial statement (other than a tax return) required to be provided to the federal or a state government or any federal or state agency other than the SEC or the Internal Revenue Service. (jurisdiction: United States (federal income tax; Title 26 of the Code of Federal Regulations, Internal Revenue Service, Department of the Treasury), entity_scope: taxpayers electing the de minimis safe harbor under § 1.263(a)–1(f), accounting_basis: United States federal income tax, effective_from: 2014-01-01)

“For purposes of this paragraph (f), the taxpayer’s applicable financial statement (AFS) is the taxpayer’s financial statement listed in paragraphs (f)(4)(i) through (iii) of this section that has the highest priority (including within paragraph (f)(4)(ii) of this section). The financial statements are, in descending priority— (i) A financial statement required to be filed with the Securities and Exchange Commission (SEC) (the 10–K or the Annual Statement to Shareholders); (ii) A certified audited financial statement that is accompanied by the report of an independent certified public accountant (or in the case of a foreign entity, by the report of a similarly qualified independent professional) that is used for— (A) Credit purposes; (B) Reporting to shareholders, partners, or similar persons; or (C) Any other substantial non-tax purpose; or (iii) A financial statement (other than a tax return) required to be provided to the federal or a state government or any federal or state agency (other than the SEC or the Internal Revenue Service).”

The $2500/$5000 de minimis limit operates as a cliff: a taxpayer cannot deduct a portion of an item up to the limitation amount (for example, cannot deduct $2500 of an item costing $3000), and the entire item does not qualify for the safe harbor. (jurisdiction: United States (federal income tax; Internal Revenue Code and Treasury Regulations administered by the IRS), entity_scope: taxpayers electing the de minimis safe harbor under Section 1.263(a)-1(f), accounting_basis: US federal income tax)

“The $2500/$5000 limit operates as a “cliff.” Taxpayers cannot deduct a portion of an item up to this limitation amount. In other words, a taxpayer cannot deduct $2500 of an item costing $3000. This entire item does not qualify for the safe harbor.”

A taxpayer without an AFS whose books-and-records policy deducts amounts of more than $2,500 ($500 prior to Jan. 1, 2016) may properly deduct those amounts for federal tax purposes as long as it can show that its reporting policy clearly reflects its income. (jurisdiction: United States (federal income tax), entity_scope: taxpayers without an applicable financial statement (AFS), accounting_basis: federal income tax, conditions: the taxpayer must be able to show the reporting policy clearly reflects income)

“If you don't have an AFS and have a policy for your books and records of deducting amounts more than $2,500 ($500 prior to Jan. 1, 2016), you may properly deduct these amounts for federal tax purposes, as long as you can show that your reporting policy clearly reflects your income.”

Partly established. Established: those amounts differentiated by the category of business the amount depends on (S27). Missing: the amounts that are actually available to a business under the applicable rules.

What a capitalization threshold does — and what it does not do

Except as provided in chapter 1 of the Internal Revenue Code, no deduction is allowed for any amount paid for new buildings or for permanent improvements or betterments made to increase the value of any property or estate, or for any amount paid in restoring property or in making good the exhaustion thereof for which an allowance is or has been made. (jurisdiction: United States (federal income tax; Title 26 of the Code of Federal Regulations, Internal Revenue Service, Department of the Treasury), entity_scope: taxpayers subject to United States federal income tax, accounting_basis: United States federal income tax, effective_from: 2014-01-01)

“Except as provided in chapter 1 of the Internal Revenue Code, no deduction is allowed for— (1) Any amount paid for new buildings or for permanent improvements or betterments made to increase the value of any property or estate; or (2) Any amount paid in restoring property or in making good the exhaustion thereof for which an allowance is or has been made.”

Section 1.263(a)–1(f) provides an elective de minimis safe harbor that permits a taxpayer not to capitalise, or not to treat as a material or supply, certain amounts paid for tangible property acquired or produced during the taxable year, provided the taxpayer meets certain requirements and the property does not exceed certain dollar limitations. (jurisdiction: United States (federal income tax administered by the Internal Revenue Service), entity_scope: Taxpayers electing the de minimis safe harbor under § 1.263(a)–1(f), accounting_basis: U.S. federal income tax (Internal Revenue Code and Income Tax Regulations), conditions: taxpayer meets certain requirements; property does not exceed certain dollar limitations; election is elective and prospective in application)

“Section 1.263(a)–1(f), for example, provides a de minimis safe harbor election that permits a taxpayer to not capitalize, or treat as a material or supply, certain amounts paid for tangible property that it acquires or produces during the taxable year provided the taxpayer meets certain requirements and the property does not exceed certain dollar limitations.”

An amount paid for property to which a taxpayer properly applies the de minimis safe harbor is not treated as a capital expenditure under § 1.263(a)–2(d)(1) or § 1.263(a)–3(d) or as a material and supply under § 1.162–3, and may be deducted under § 1.162–1 in the taxable year the amount is paid, provided the amount otherwise constitutes an ordinary and necessary expense incurred in carrying on a trade or business. (jurisdiction: United States (federal income tax; Title 26 of the Code of Federal Regulations, Internal Revenue Service, Department of the Treasury), entity_scope: taxpayers electing the de minimis safe harbor under § 1.263(a)–1(f), accounting_basis: United States federal income tax, effective_from: 2014-01-01, conditions: the taxpayer elects to apply the de minimis safe harbor under § 1.263(a)–1(f); the amount otherwise constitutes an ordinary and necessary expense incurred in carrying on a trade or business)

“An amount paid for property to which a taxpayer properly applies the de minimis safe harbor contained in this paragraph (f) is not treated as a capital expenditure under § 1.263(a)–2(d)(1) or § 1.263(a)–3(d) or as a material and supply under § 1.162–3, and may be deducted under § 1.162–1 in the taxable year the amount is paid provided the amount otherwise constitutes an ordinary and necessary expense incurred in carrying on a trade or business.”

The de minimis safe harbor does not limit a taxpayer's ability to deduct otherwise deductible repair or maintenance costs above the safe harbor amount; it merely establishes a minimum threshold below which all qualifying amounts are considered deductible. (jurisdiction: United States (federal income tax administered by the Internal Revenue Service), entity_scope: Taxpayers applying the de minimis safe harbor under § 1.263(a)–1(f), accounting_basis: U.S. federal income tax (Internal Revenue Code and Income Tax Regulations), conditions: concerns otherwise deductible repair or maintenance costs)

“The de minimis safe harbor does not limit a taxpayer’s ability to deduct otherwise deductible repair or maintenance costs that exceed the amount subject to the safe harbor. The safe harbor merely establishes a minimum threshold below which all qualifying amounts are considered deductible.”

A capitalization limit is the threshold above which an entity capitalizes purchased or constructed assets; purchases below the limit are generally charged to expense instead. (jurisdiction: United States, entity_scope: Businesses (entities setting a fixed-asset capitalization policy), conditions: Applies to purchased or constructed assets)

“A capitalization limit ("cap limit") is the threshold above which an entity capitalizes purchased or constructed assets. Below the cap limit, you generally charge purchases to expense instead.”

Required authority: authoritative professional or accounting standard, primary regulator or government. Highest achieved: high quality professional secondary reference, primary regulator or government.

Choosing your own number within what is permitted

No particular capitalization limit is specifically required, and a business should weigh a number of factors before settling on the limit most appropriate to it. (jurisdiction: United States, entity_scope: Businesses (entities setting a fixed-asset capitalization policy))

“There is no specifically required cap limit; a business should consider a number of factors before settling upon the most appropriate limit.”

U.S. GAAP does not require a specific capitalization limit and instead relies on the concept of materiality and on management judgment. (jurisdiction: United States, entity_scope: Businesses (entities setting a fixed-asset capitalization policy), accounting_basis: U.S. GAAP)

“U.S. GAAP does not require a specific capitalization limit. Instead, it relies on the concept of materiality and management judgment.”

A smaller business with few expenditures may be willing to accept a capitalization threshold as low as $1,000, while a larger business that may be overwhelmed by fixed-asset recordation requirements may prefer a very high limit, such as $50,000; the figures are illustrative examples of the range, not prescribed amounts. (jurisdiction: United States, entity_scope: smaller businesses and larger businesses, conditions: volume of expenditures; administrative burden of fixed-asset recordation requirements)

“A smaller business with few expenditures may be willing to accept a low capitalization threshold of just $1,000, whereas a larger business that may be overwhelmed by the recordation requirements of fixed assets may prefer a very high limit, such as $50,000.”

A low cap limit creates a larger fixed assets register on which the local government jurisdiction will charge personal property taxes, while an excessively high cap limit yields so few reportable assets that it may trigger a time-consuming government tax audit. (jurisdiction: United States, entity_scope: Businesses subject to local personal property tax on fixed assets, conditions: Local government jurisdiction levies personal property taxes on reportable assets)

“Setting a low cap limit will also create a larger fixed assets register on which the local government jurisdiction will be more than happy to charge personal property taxes, whereas an excessively high cap limit will yield so few reportable assets that it may trigger a time-consuming government tax audit.”

Because GAAP sets no limit, a business setting a capitalization limit should discuss the issue with its outside auditors to confirm they agree the proposed limit is reasonable for that business. (jurisdiction: United States (Generally Accepted Accounting Principles), entity_scope: businesses with outside auditors, accounting_basis: Generally Accepted Accounting Principles)

“Accordingly, when setting a capitalization limit, you should discuss the issue with your outside auditors, to ensure that they are in agreement that your proposed limit is a reasonable one for your business.”

Where competitors capitalize assets in a certain manner, a business may want to follow suit so that the financial statements it provides to the investment community are comparable to those of competitors. (jurisdiction: United States, entity_scope: businesses with competitors reporting to the investment community)

“If competitors capitalize their assets in a certain manner, a business may want to follow suit, in order to provide financial statements to the investment community that are comparable to those issued by competitors.”

Required authority: authoritative lender insurer or program documentation, authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.

When the policy has to exist — and what if purchases were already coded

See For the de minimis safe harbor to apply to a taxpayer under paragraph (f)(1)(i), the taxpayer must have an applicable financial statement as defined in paragraph (f)(4); must have at the beginning of the taxable year written accounting procedures treating as an expense for non-tax purposes amounts paid for property costing less than a specified dollar amount, or amounts paid for property with an economic useful life (as defined in § 1.162–3(c)(4)) of 12 months or less; and must treat the amount paid for the property as an expense on its applicable financial statement in accordance with its written accounting procedures.

See For the de minimis safe harbor to apply to a taxpayer under paragraph (f)(1)(ii), the taxpayer must not have an applicable financial statement as defined in paragraph (f)(4); must have at the beginning of the taxable year accounting procedures treating as an expense for non-tax purposes amounts paid for property costing less than a specified dollar amount, or amounts paid for property with an economic useful life (as defined in § 1.162–3(c)(4)) of 12 months or less; and must treat the amount paid for the property as an expense on its books and records in accordance with those accounting procedures.

In assessing audit risk on the de minimis safe harbor, examiners are directed to review the taxpayer's written accounting procedures identifying de minimis amounts for book and financial purposes and to ask whether the policy is in writing and whether it is in effect at the beginning of the tax year. (jurisdiction: United States (federal income tax; Internal Revenue Code and Treasury Regulations administered by the IRS), entity_scope: IRS examiners reviewing a taxpayer's de minimis safe harbor treatment, accounting_basis: US federal income tax)

“Review the taxpayer’s written accounting procedures identifying de minimis amounts for book and financial purposes. • Is the policy in writing? • Is the policy in effect at the beginning of the tax year?”

The de minimis safe harbor election may not be made through the filing of an application for change in accounting method or, before obtaining the Commissioner's consent to make a late election, by filing an amended Federal tax return; and a taxpayer may not revoke an election made under paragraph (f). (jurisdiction: United States (federal income tax; Title 26 of the Code of Federal Regulations, Internal Revenue Service, Department of the Treasury), entity_scope: taxpayers electing the de minimis safe harbor under § 1.263(a)–1(f), accounting_basis: United States federal income tax, effective_from: 2014-01-01, conditions: the taxpayer elects to apply the de minimis safe harbor under § 1.263(a)–1(f))

“An election may not be made through the filing of an application for change in accounting method or, before obtaining the Commissioner’s consent to make a late election, by filing an amended Federal tax return. A taxpayer may not revoke an election made under this paragraph (f).”

If an amount does not qualify under the de minimis safe harbor, the taxpayer should treat the amount under the normal rules that apply — for instance currently deductible if paid for incidental materials and supplies or for repair and maintenance — and this treatment is proper regardless of whether the amount exceeds the applicable de minimis limitation. (jurisdiction: United States (federal income tax), accounting_basis: federal income tax)

“If an amount doesn't qualify under the de minimis safe harbor, you should treat the amount under the normal rules that apply, i.e., currently deductible if paid for incidental materials and supplies or for repair and maintenance. This treatment is proper regardless of whether the amount exceeds the applicable de minimis safe harbor limitation.”

Partly established. Established: when the written policy must be in place relative to the period it governs (S02). Missing: the position for a business that adopts a written policy after purchases have already been coded.

What the written policy has to state, and who approves it

The accounting policy may be either a set dollar amount per item or a policy expensing amounts paid for property with an economic useful life of 12 months or less, and for safe harbor purposes either or both accounting procedures is permissible; however, under either book policy, if the cost of a unit of property (determined on either an invoice basis or an item basis) exceeds the safe harbor limit of $5000 for taxpayers with an AFS or $2500 without, the amount paid will not fall within the safe harbor for tax purposes. (jurisdiction: United States (federal income tax; Internal Revenue Code and Treasury Regulations administered by the IRS), entity_scope: taxpayers electing the de minimis safe harbor under Section 1.263(a)-1(f), accounting_basis: US federal income tax)

“The accounting policy may be either a set dollar amount per item or, a policy that expenses amounts paid for property with an economic useful life of 12 months or less. For safe harbor purposes, either or both accounting procedure(s) is permissible. However, under either book policy, if the cost of a UOP (determined on either an invoice basis or an item basis) exceeds the safe harbor limit of $5000 for taxpayers with AFS or $2500 without, the amount paid for the property will not fall within the safe harbor for tax purposes.”

If an invoice includes amounts paid for multiple tangible properties and also includes additional invoice costs related to those properties, the taxpayer must allocate the additional invoice costs to each property using a reasonable method, and each property, including allocable labor and overhead, must meet the requirements of paragraph (f)(1)(i) or (f)(1)(ii), whichever is applicable; reasonable allocation methods include, but are not limited to, specific identification, a pro rata allocation, or a weighted average method based on the property's relative cost. (jurisdiction: United States (federal income tax; Title 26 of the Code of Federal Regulations, Internal Revenue Service, Department of the Treasury), entity_scope: taxpayers electing the de minimis safe harbor under § 1.263(a)–1(f), accounting_basis: United States federal income tax, effective_from: 2014-01-01, conditions: the taxpayer elects to apply the de minimis safe harbor under § 1.263(a)–1(f))

“For purposes of this paragraph, if the invoice includes amounts paid for multiple tangible properties and such invoice includes additional invoice costs related to these multiple properties, then the taxpayer must allocate the additional invoice costs to each property using a reasonable method, and each property, including allocable labor and overhead, must meet the requirements of paragraph (f)(1)(i) or paragraph (f)(1)(ii) of this section, whichever is applicable. Reasonable allocation methods include, but are not limited to specific identification, a pro rata allocation, or a weighted average method based on the property’s relative cost.”

The de minimis safe harbor is an annual election: a taxpayer may apply it in one year and not the next, but in an election year the taxpayer must consistently apply the safe harbor to all amounts paid for the acquisition or improvement of tangible property, including acquisitions of materials and supplies that also meet the safe harbor requirements, and cannot choose to apply it to some items and not others. (jurisdiction: United States (federal income tax; Internal Revenue Code and Treasury Regulations administered by the IRS), entity_scope: taxpayers electing the de minimis safe harbor under Section 1.263(a)-1(f), accounting_basis: US federal income tax, conditions: election made for the taxable year)

“The safe harbor is an annual election. A taxpayer may choose to apply the safe harbor in one year, but not in the next. A taxpayer must consistently apply the safe harbor to all amounts paid during an election year for the acquisition or improvement of tangible property, including the acquisition of materials and supplies that also meet the safe harbor requirements. A taxpayer cannot choose to apply the safe harbor to some items and not to others.”

The capitalization policy is typically approved/set by senior management, or in some cases by the board of directors; the article states this as usual practice, not as a requirement. (jurisdiction: United States, entity_scope: companies)

“The policy is typically set by senior management or even the board of directors.”

A capitalization policy should specify whether bundled or composite purchases are capitalized as a single asset or separated into individual components — i.e. it should state the unit the threshold is applied to. (jurisdiction: United States, entity_scope: entities with capitalization policies)

“Capitalization policies should specify whether bundled or composite purchases are capitalized as a single asset or separated into individual components.”

In the article's illustrative example, a software company's policy states its scope (technology-related purchases), its amount ($5,000) and the unit the amount is applied to (per unit): computers, servers and networking equipment costing $5,000 or more per unit are capitalized and depreciated over useful lives typically of 3 to 5 years, while items costing less are expensed immediately. (jurisdiction: United States, entity_scope: illustrative software company)

“A software company sets a capitalization threshold of $5,000 for technology-related purchases. Under this policy, computers, servers, and networking equipment costing $5,000 or more per unit are capitalized as fixed assets and depreciated over their useful lives, typically 3 to 5 years. Items costing less than $5,000 are expensed immediately.”

Partly established. Established: the amount (S02); the unit the amount is applied to (S27, S31). Missing: the scope of the written policy; the effective date; the approval; the commitment to consistent application.

When your business faces more than one threshold

A taxpayer may elect to apply a de minimis safe harbor to amounts paid to acquire or produce tangible property, but only to the extent those amounts are deducted by the taxpayer for financial accounting purposes or in keeping its books and records. (jurisdiction: United States (federal income tax), entity_scope: any person that pays or incurs amounts to acquire, produce or improve tangible real or personal property in a trade or business, accounting_basis: federal income tax; conformity with financial accounting / books and records treatment, effective_from: 2014-01-01, conditions: the amounts must be deducted by the taxpayer for financial accounting purposes or in keeping its books and records; the safe harbor applies only by election)

“Under the final tangibles regulations, you may elect to apply a de minimis safe harbor to amounts paid to acquire or produce tangible property to the extent such amounts are deducted by you for financial accounting purposes or in keeping your books and records.”

For 2 CFR part 200, equipment means tangible personal property (including information technology systems) having a useful life of more than one year and a per-unit acquisition cost that equals or exceeds the lesser of two amounts: the capitalization level established by the recipient or subrecipient for its own financial statement purposes, or $10,000. Because the test is the lesser of the two, a recipient or subrecipient whose own financial-statement capitalization level sits below $10,000 is held to that lower level for this purpose. (jurisdiction: United States (Federal), entity_scope: recipients and subrecipients of Federal awards subject to 2 CFR part 200, conditions: per-unit acquisition cost test; useful life of more than one year; stated as the definition of ‘equipment’ for purposes of 2 CFR part 200; 2 CFR Ch. II, revised as of January 1, 2025 edition (GPO); part 200 SOURCE credit 89 FR 30136, Apr. 22, 2024)

“Equipment means tangible personal property (including information technology systems) having a useful life of more than one year and a per-unit acquisition cost that equals or exceeds the lesser of the capitalization level established by the recipient or subrecipient for financial statement purposes, or $10,000.”

The IRS's stated reason for allowing a larger safe harbor limitation to a taxpayer with an AFS is that an AFS provides independent assurance that the taxpayer's de minimis policies are consistent with GAAP requirements and do not materially distort the taxpayer's financial statement income. (jurisdiction: United States (federal income tax administered by the Internal Revenue Service), entity_scope: Taxpayers with an applicable financial statement (AFS), accounting_basis: U.S. federal income tax (Internal Revenue Code and Income Tax Regulations), conditions: stated as the rationale for the difference in limits between taxpayers with and without an AFS)

“A larger safe harbor limitation is reasonable for a taxpayer with an AFS because an AFS provides independent assurance that the taxpayer’s de minimis policies are consistent with the requirements of generally accepted accounting principles (“GAAP”) and do not materially distort the taxpayer’s financial statement income.”

A recipient or subrecipient of a Federal award must provide for real property and equipment acquired or improved with Federal funds insurance coverage at least equivalent to that it provides for property and equipment it owns itself; the Federal-award requirement is pegged to the entity's own existing practice as a minimum. (jurisdiction: United States (Federal awards subject to 2 CFR part 200, OMB Guidance), entity_scope: Recipients and subrecipients of a Federal award, conditions: applies to real property and equipment acquired or improved with Federal funds)

“The recipient or subrecipient must, at a minimum, provide the equivalent insurance coverage for real property and equipment acquired or improved with Federal funds as provided to property and equipment owned by the recipient or subrecipient.”

Required authority: authoritative lender insurer or program documentation, authoritative professional or accounting standard, primary regulator or government. Highest achieved: high quality professional secondary reference, primary regulator or government.

Showing that the policy was actually followed

See The de minimis safe harbor is an annual election: a taxpayer may apply it in one year and not the next, but in an election year the taxpayer must consistently apply the safe harbor to all amounts paid for the acquisition or improvement of tangible property, including acquisitions of materials and supplies that also meet the safe harbor requirements, and cannot choose to apply it to some items and not others.

Among the audit-risk questions on the de minimis safe harbor, examiners are directed to ask whether the taxpayer follows the policy it established for book or financial purposes. (jurisdiction: United States (federal income tax; Internal Revenue Code and Treasury Regulations administered by the IRS), entity_scope: IRS examiners reviewing a taxpayer's de minimis safe harbor treatment, accounting_basis: US federal income tax)

“Does the taxpayer follow the policy established for book or financial purposes?”

The final tangible property regulations were issued in 2013 and taxpayers were required to correct any prior method changes to comply with them for tax years beginning on or after January 1, 2014; the burden of proof rests with the taxpayer, and taxpayers must maintain sufficient contemporaneous records. (jurisdiction: United States (federal income tax; Internal Revenue Code and Treasury Regulations administered by the IRS), entity_scope: taxpayers filing US federal income tax returns that hold tangible property used in a trade or business, accounting_basis: US federal income tax, effective_from: tax years beginning on or after 2014-01-01)

“The final regulations were issued in 2013. Taxpayers were required to correct any prior method changes to comply with these regulations for tax years beginning on or after January 1, 2014. The burden of proof rests with the taxpayer, and taxpayers must maintain sufficient contemporaneous records.”

Among the interview questions, the examiner is to determine whether the taxpayer has changed its written accounting procedures for fixed assets, dispositions, depreciation, materials and supplies, or de minimis units of property and, if so, to request written support for all current and past policies and to consider the de minimis safe harbor thresholds of $500, $2500 or $5000. (jurisdiction: United States (federal income tax; Internal Revenue Code and Treasury Regulations administered by the IRS), entity_scope: IRS examiners interviewing a taxpayer about its tangible property accounting, accounting_basis: US federal income tax)

“Has the taxpayer changed its written accounting procedures for fixed assets, dispositions, depreciation, materials and supplies, or de minimis UOPs? • If so, request written support for all current and past policies. • Consider thresholds for the de minimis safe harbor ($500, $2500, or $5000).”

If the taxpayer provides supporting documentation or proof, examiners are directed to consider whether the taxpayer's deduction or de minimis policy for items costing more than the safe harbor limit clearly reflects the taxpayer's income. (jurisdiction: United States (federal income tax; Internal Revenue Code and Treasury Regulations administered by the IRS), entity_scope: IRS examiners reviewing a taxpayer's de minimis safe harbor treatment, accounting_basis: US federal income tax)

“If the taxpayer provides supporting documentation/proof, consider whether taxpayer’s deduction or de minimis policy for items that cost more than the safe harbor limit clearly reflects the taxpayer’s income.”

Organizations must apply their capitalization policy consistently and reasonably. (jurisdiction: United States, entity_scope: Businesses (entities setting a fixed-asset capitalization policy), accounting_basis: U.S. GAAP)

“Organizations must apply their capitalization policy consistently and reasonably.”

Not established from an authoritative source.

Required authority: primary regulator or government. Highest achieved: primary regulator or government.

Changing the threshold later

An annual election is not a change in method of accounting, so the taxpayer should not file Form 3115 to use the de minimis safe harbor for a particular tax year, and should not file a Form 3115 to change the amount it deducts under its book policy. (jurisdiction: United States (federal income tax), accounting_basis: federal income tax)

“An annual election is not a change in method of accounting. Therefore, you should not file Form 3115, Application for Change in Method of Accounting, to use the de minimis safe harbor for a particular tax year, and you should not file a Form 3115 to change the amount you deduct under your book policy.”

Except for paragraph (f) (the de minimis safe harbor election), a change to comply with § 1.263(a)–1 is a change in method of accounting to which sections 446 and 481 and the accompanying regulations apply, and a taxpayer seeking to change to a method of accounting permitted in the section must secure the consent of the Commissioner in accordance with § 1.446–1(e) and follow the administrative procedures issued under § 1.446–1(e)(3)(ii). (jurisdiction: United States (federal income tax; Title 26 of the Code of Federal Regulations, Internal Revenue Service, Department of the Treasury), entity_scope: taxpayers subject to United States federal income tax, accounting_basis: United States federal income tax, effective_from: 2014-01-01)

“Except for paragraph (f) of this section (the de minimis safe harbor election), a change to comply with this section is a change in method of accounting to which the provisions of sections 446 and 481 and the accompanying regulations apply. A taxpayer seeking to change to a method of accounting permitted in this section must secure the consent of the Commissioner in accordance with § 1.446–1(e) and follow the administrative procedures issued under § 1.446– 1(e)(3)(ii) for obtaining the Commissioner’s consent to change its accounting method.”

Generally a taxpayer receives automatic consent to change a method of accounting by completing and filing Form 3115, Application for Change in Accounting Method, and including it with its timely filed original federal tax return for the year of change. (jurisdiction: United States (federal income tax), accounting_basis: federal income tax)

“Generally, you receive automatic consent to change a method of accounting by completing and filing Form 3115, Application for Change in Accounting Method , and including it with your timely filed original federal tax return for the year of change.”

A taxpayer can generally rely on its financial accounting procedures that are in place at the beginning of a taxable year and that provide a de minimis expense policy for financial or book accounting. (jurisdiction: United States (federal income tax; Internal Revenue Code and Treasury Regulations administered by the IRS), entity_scope: taxpayers electing the de minimis safe harbor under Section 1.263(a)-1(f), accounting_basis: US federal income tax, conditions: procedures in place at the beginning of the taxable year)

“A taxpayer can generally rely on its financial accounting procedures in place at the beginning of a taxable year that provides a de minimis expense policy for financial or book accounting.”

See Among the interview questions, the examiner is to determine whether the taxpayer has changed its written accounting procedures for fixed assets, dispositions, depreciation, materials and supplies, or de minimis units of property and, if so, to request written support for all current and past policies and to consider the de minimis safe harbor thresholds of $500, $2500 or $5000.

Partly established. Established: what applies to a change (S43). Missing: how the threshold is changed; from when a new threshold operates; how the change is documented.

Required authority: authoritative professional or accounting standard, primary regulator or government. Highest achieved: primary regulator or government.

The federal tax rule that conditions expensing on an accounting procedure

See For the de minimis safe harbor to apply to a taxpayer under paragraph (f)(1)(i), the taxpayer must have an applicable financial statement as defined in paragraph (f)(4); must have at the beginning of the taxable year written accounting procedures treating as an expense for non-tax purposes amounts paid for property costing less than a specified dollar amount, or amounts paid for property with an economic useful life (as defined in § 1.162–3(c)(4)) of 12 months or less; and must treat the amount paid for the property as an expense on its applicable financial statement in accordance with its written accounting procedures.

See For the de minimis safe harbor to apply to a taxpayer under paragraph (f)(1)(ii), the taxpayer must not have an applicable financial statement as defined in paragraph (f)(4); must have at the beginning of the taxable year accounting procedures treating as an expense for non-tax purposes amounts paid for property costing less than a specified dollar amount, or amounts paid for property with an economic useful life (as defined in § 1.162–3(c)(4)) of 12 months or less; and must treat the amount paid for the property as an expense on its books and records in accordance with those accounting procedures.

See A taxpayer may elect to apply a de minimis safe harbor to amounts paid to acquire or produce tangible property, but only to the extent those amounts are deducted by the taxpayer for financial accounting purposes or in keeping its books and records.

See If an amount does not qualify under the de minimis safe harbor, the taxpayer should treat the amount under the normal rules that apply — for instance currently deductible if paid for incidental materials and supplies or for repair and maintenance — and this treatment is proper regardless of whether the amount exceeds the applicable de minimis limitation.

See The de minimis safe harbor election may not be made through the filing of an application for change in accounting method or, before obtaining the Commissioner's consent to make a late election, by filing an amended Federal tax return; and a taxpayer may not revoke an election made under paragraph (f).

Partly established. Established: whether federal tax rules condition the expensing of lower-cost tangible property on an accounting procedure that is written and in place before the period (S02); what that accounting procedure must state (S02, S03); what consistency between the books and the return is required (S02, S03, S33). Missing: the position under those rules of purchases already charged to the period where no qualifying written procedure was in place for the period in which they were incurred.

The permitted threshold amounts, by category of business, and the unit they apply to

See For the de minimis safe harbor to apply to a taxpayer with an applicable financial statement, the amount paid for the property must not exceed $5,000 per invoice (or per item as substantiated by the invoice), or such other amount as identified in published guidance in the Federal Register or in the Internal Revenue Bulletin.

See A taxpayer without an AFS may use the de minimis safe harbor to deduct amounts up to $2,500 per invoice or item ($500 for amounts prior to Jan. 1, 2016), as substantiated by invoice.

The § 1.263(a)–1(f)(1)(ii)(D) de minimis safe harbor limitation for a taxpayer without an AFS is increased from $500 to $2,500. (jurisdiction: United States (federal income tax administered by the Internal Revenue Service), entity_scope: Taxpayers without an applicable financial statement (AFS), accounting_basis: U.S. federal income tax (Internal Revenue Code and Income Tax Regulations), effective_from: 2016-01-01, conditions: applies to the limit in § 1.263(a)–1(f)(1)(ii)(D))

“Having considered taxpayers’ comments, the goal of the final tangible property regulations to reduce administrative burden, and the concern that taxpayers’ methods of accounting clearly reflect income, the § 1.263(a)–1(f)(1)(ii)(D) de minimis safe harbor limitation for a taxpayer without an AFS is increased from $500 to $2,500.”

Notice 2015–82, and therefore the increased $2,500 de minimis safe harbor limit it sets for taxpayers without an AFS, is effective for costs incurred during taxable years beginning on or after January 1, 2016. (jurisdiction: United States (federal income tax administered by the Internal Revenue Service), entity_scope: Costs incurred during taxable years beginning on or after January 1, 2016, accounting_basis: U.S. federal income tax (Internal Revenue Code and Income Tax Regulations), effective_from: 2016-01-01, conditions: effectiveness is keyed to when the cost is incurred, within a taxable year beginning on or after January 1, 2016)

“This Notice is effective for costs incurred during taxable years beginning on or after January 1, 2016.”

See For purposes of paragraph (f), a taxpayer's applicable financial statement is the taxpayer's financial statement listed in paragraphs (f)(4)(i) through (iii) that has the highest priority, the descending priority being: a financial statement required to be filed with the Securities and Exchange Commission (the 10-K or the Annual Statement to Shareholders); a certified audited financial statement accompanied by the report of an independent certified public accountant (or, for a foreign entity, of a similarly qualified independent professional) used for credit purposes, for reporting to shareholders, partners, or similar persons, or for any other substantial non-tax purpose; and a financial statement (other than a tax return) required to be provided to the federal or a state government or any federal or state agency other than the SEC or the Internal Revenue Service.

If a taxpayer has an applicable financial statement as defined in paragraph (f)(4) in addition to a financial statement that does not meet the requirements of paragraph (f)(4), the taxpayer must meet the requirements of paragraph (f)(1)(i) to qualify to elect the de minimis safe harbor. (jurisdiction: United States (federal income tax; Title 26 of the Code of Federal Regulations, Internal Revenue Service, Department of the Treasury), entity_scope: taxpayers holding both an applicable financial statement and a financial statement that does not meet the requirements of § 1.263(a)–1(f)(4), accounting_basis: United States federal income tax, effective_from: 2014-01-01, conditions: the taxpayer elects to apply the de minimis safe harbor under § 1.263(a)–1(f))

“For purposes of this paragraph (f)(1), if a taxpayer has an applicable financial statement defined in paragraph (f)(4) of this section in addition to a financial statement that does not meet requirements of paragraph (f)(4) of this section, the taxpayer must meet the requirements of paragraph (f)(1)(i) of this section to qualify to elect the de minimis safe harbor under this paragraph (f).”

What the accounting framework says about capitalization thresholds and materiality

Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.

Thresholds and property rules imposed by funders, programmes and insurers

See For 2 CFR part 200, equipment means tangible personal property (including information technology systems) having a useful life of more than one year and a per-unit acquisition cost that equals or exceeds the lesser of two amounts: the capitalization level established by the recipient or subrecipient for its own financial statement purposes, or $10,000. Because the test is the lesser of the two, a recipient or subrecipient whose own financial-statement capitalization level sits below $10,000 is held to that lower level for this purpose.

The terms listed in § 200.1 are definitions of key terms frequently used in 2 CFR part 200 and apply for purposes of that part; definitions found in Federal statutes or regulations that apply to particular programs take precedence over them, but where a § 200.1 definition implements a specific statutory requirement that applies government-wide, such as the Single Audit Act, the § 200.1 definition takes precedence over Federal regulations. (jurisdiction: United States (Federal), entity_scope: recipients and subrecipients of Federal awards subject to 2 CFR part 200, conditions: 2 CFR Ch. II, revised as of January 1, 2025 edition (GPO); part 200 SOURCE credit 89 FR 30136, Apr. 22, 2024)

“The following is a list of definitions of key terms frequently used in 2 CFR part 200. Definitions found in Federal statutes or regulations that apply to particular programs take precedence over the following definitions. However, where the following definitions implement specific statutory requirements that apply government-wide, such as the Single Audit Act, the following definitions take precedence over Federal regulations. For purposes of this part, the following definitions apply:”

A recipient or subrecipient holding Federally owned property in its custody must submit an inventory listing of that property to the Federal agency or pass-through entity annually — a property-tracking and reporting cadence imposed by the funding programme itself. (jurisdiction: United States (Federal awards subject to 2 CFR part 200, OMB Guidance), entity_scope: Recipients and subrecipients of a Federal award, conditions: Federally owned property in the entity's custody; annual cadence)

“The recipient or subrecipient must submit an inventory listing of Federally owned property in its custody to the Federal agency or passthrough entity on an annual basis.”

See A recipient or subrecipient of a Federal award must provide for real property and equipment acquired or improved with Federal funds insurance coverage at least equivalent to that it provides for property and equipment it owns itself; the Federal-award requirement is pegged to the entity's own existing practice as a minimum.

Not established from an authoritative source.

Changing an adopted accounting procedure under the tax rules

See An annual election is not a change in method of accounting, so the taxpayer should not file Form 3115 to use the de minimis safe harbor for a particular tax year, and should not file a Form 3115 to change the amount it deducts under its book policy.

See Except for paragraph (f) (the de minimis safe harbor election), a change to comply with § 1.263(a)–1 is a change in method of accounting to which sections 446 and 481 and the accompanying regulations apply, and a taxpayer seeking to change to a method of accounting permitted in the section must secure the consent of the Commissioner in accordance with § 1.446–1(e) and follow the administrative procedures issued under § 1.446–1(e)(3)(ii).

See Generally a taxpayer receives automatic consent to change a method of accounting by completing and filing Form 3115, Application for Change in Accounting Method, and including it with its timely filed original federal tax return for the year of change.

See Among the interview questions, the examiner is to determine whether the taxpayer has changed its written accounting procedures for fixed assets, dispositions, depreciation, materials and supplies, or de minimis units of property and, if so, to request written support for all current and past policies and to consider the de minimis safe harbor thresholds of $500, $2500 or $5000.

See A taxpayer can generally rely on its financial accounting procedures that are in place at the beginning of a taxable year and that provide a de minimis expense policy for financial or book accounting.

Partly established. Established: whether any formal procedure or notification applies to the change (S43). Missing: from when the new threshold operates.

Keeping the policy with the records it supports

See The final tangible property regulations were issued in 2013 and taxpayers were required to correct any prior method changes to comply with them for tax years beginning on or after January 1, 2014; the burden of proof rests with the taxpayer, and taxpayers must maintain sufficient contemporaneous records.

See Among the interview questions, the examiner is to determine whether the taxpayer has changed its written accounting procedures for fixed assets, dispositions, depreciation, materials and supplies, or de minimis units of property and, if so, to request written support for all current and past policies and to consider the de minimis safe harbor thresholds of $500, $2500 or $5000.

Not established from an authoritative source.

Changing an accounting policy under the accounting framework

Not established from an authoritative source.