Discussion:Minimum $$$ to Depreciate

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Discussion Forum Index --> Tax Questions --> Minimum $$$ to Depreciate


Swflacpa (talk|edits) said:

6 July 2006

Is there a set amount for depreciation? I remember my old boss told me to depreciate anything over $500 but I cannot find supporting documentation on this in publication 946.

Jeff

Sandysea (talk|edits) said:

6 July 2006
This is a particular item of discussion among accountants, but I also don't capitalize anything less than 500.00; even that will not be capitalized if it does not have a useful life over 1 year. The key is the life of the asset; if it is going to last for over 1 year, then depreciate it but a clock too can have a life of over a year, but it costs about 49.00...so my rule of thumb is to capitalize and depreciate it if it cost more than 500.00 AND has a useful life of over 1 year...

MSTguy (talk|edits) said:

6 July 2006
I too like thresholds for cap. versus expense, but in certain circumstances it might be easier to take multiple immaterial items and group them together - for example, several tools costing $400 each or furniture, small appliances, etc. - then just expense the total amount under sec. 179 (keep in mind profit limits and assets placed in service limits). This way you're technically capitalizing capital assets and still getting the expense benefit.

Chautauqua (talk|edits) said:

6 July 2006
Each company should have a policy where asset purchases are expensed rather than capitalizing and depreciating, and this policy should be in writing (approved by the Board of Directors?) and consistently followed. For a small company, this amount may be $500. For a very large company, the amount may be higher, perhaps $2,000 or more.

Sandysea (talk|edits) said:

6 July 2006
And remember that typically Capitalized items are subject to the tangible personal property tax return in Florida SW. So if you capitalize it, then the tax collector in the county as well wants a bite from the proverbial apple :)

Death&Taxes (talk|edits) said:

6 July 2006
I can hear Wayne and Jerry at the NCPE seminars telling us about a case where the courts did not even bother with anything under $500; I tried to find it in their seminar book but couldn't. Sandy's point about property taxes aside, I always recall an office auditor capitalizing a $492 item, whereby I had to amend the next two years. So for years I would 179 anything that walked, talked or moved, but that auditor's ploy has been rendered moot since Section 179 can now be elected or revoked on an amended return.

JR1 (talk|edits) said:

6 July 2006
There is nothing in the regs on this. At a GearUp seminar about two years ago, the break clearly came at either 500 or 1000, and I bumped mine to 1000 at that time. There's no authority for it, merely customary accounting practice I suppose. Interesting that I'm the only one at 1000 so far. I expected a split vote.

Death&Taxes (talk|edits) said:

6 July 2006
A $52,880 roof was accepted as a repair in Thomas J. Northen, Jr. et ux vs Comm, TC Summary Opinion 2003-113. This case affirmed the 1967 Oberman Mfg case on this issue, in that the Court found that to stop a leak, there was no replacement or substitution of the roof.

My practice has rarely had anyone exceed the 179 limits, and most of my clients are individuals, but since 179 cannot be used for rental property, cases like this are of great interest. My problem cases are employees, players in major symphony orchestras, who buy expensive instruments. Courts in the 2nd and 3rd Circuit have found them depreciable, but since they are Miscellaneous deductions, AMT makes much of the depreciation expense moot, so that I find myself electing long lives. I tell them to embark on careers as soloists, so that Schedule C will take the depreciation.

Jake (talk|edits) said:

6 July 2006
When I think of all the $350 stoves, refrigerators, water heaters carpeting, doors etc. that I depreciated over the years, and the complication this added when the property was sold, this discussion makes me want to cry. Section 179 ought to be extended to real property rentals. I always used a $100 cutoff on the theory that you don't depreciate paper clips.

DZCPA (talk|edits) said:

6 July 2006
I also use $1000.00 Never had a problem with the IRS. Those using anything under that are wasting their time and the clients money. I consider writing off real estate repairs if they do not exceed 10% of the FMV of the real estate. If greater, I consider depreciation of improvement.

Michaelstar (talk|edits) said:

6 July 2006
Well, I hate to say this but I use $250 for the cut off. To many desks go for $400-450 and it does not seem to me that a business can furniture the entire office space (except the owners) with $450 desks and $400 chairs and have no fixed assets. I certainly take advantage of sec 179 but to use $1,000 seems very high. My business clients mostly generate gross revenue under $5 million. This is a very interesting post - keep it going. Based on "industry standard" I may need to print this out for my files and change the cut off. It would also be helpful it those of you who write to this post also include if you have had any IRS audits where this has been discussed.

Death&Taxes (talk|edits) said:

7 July 2006
Jake, you hit the nail on the head about rentals. Some clients use the term 'replacements,' especially when the rentals are in vacation areas with rental periods measured in terms of weeks. I like that word and using the logic of Northen's roof, if the stove, fridge or water heater ceases to work, replacing is an option in order to keep the property rented.

Swflacpa (talk|edits) said:

9 July 2006
Thanks for all the input. You know come to think of it I have seen folks use capitalization limits as low as Jake ($100) uses and as high as JR ($1000) uses. Then again, I think that Michael brings up a good point with the furniture and fixtures, especially when you add in Sandy's point about the tangible personal property tax.

I was talking to an officer at the property tax office - she said you better at least have a phone and a desk on the return as all companies need them. However, on the return you are also supposed to record supplies (not capitalizable). Who knows what’s best there?

Then there's the 1 year rule.

I think I like the $1,000 limit, the 1 year rule and the grouping concept like MSTguy mentioned. The reason is there are so many small expensive electronic gadgets out there that may be lost or break real quick; but items that tend to stick around forever like furniture add to the value of the business as a group. Also, capitalizing these group items may be desirable from a financial planning viewpoint. For example, if the business wants to get financing, a healthy balance sheet always helps.

Jeff

ConservativeDC (talk|edits) said:

9 July 2006
In my opinion, the use of an arbitrary "cost of the asset" cutoff is inappropriate. What makes an asset capitalized instead of expensed is purely and entirely its useful life.

If I buy a desk for $7, that does't change the fact that I have to take a depreciation deduction of $1 a year. Of course, this is what Sec 179 was made for.

Conversely, if I buy a giant box of paper clips for $20,000 (not that this would happen in the real world), that is a business expense. Those paper clips have a useful life of one year (the owner would have to be careful that most or all of the paper clips were used in year one).

The cost of the asset has absolutely nothing to do with it.

That being said, I agree that Section 179 should be broadened to include rental and other non-personal acquisitions of assets. It should also not have dollar limits of any kind. But then again, I'm not Congress--I'm just a lowly tax preparer.

JR1 (talk|edits) said:

July 10, 2006
So, Conservative, you're one of those guys whose returns I've gotten where you literally depreciate a $57 broom and two pages of other crap just because it isn't biodegradable? Sorry, but a depreciable asset doesn't just last forever, but has to have reasonable value to make it worth tracking and reporting separately. And I hate to tell you, but those paperclips are also depreciable under your rules. After all, they will last forever unless bent and broken, or left to rust outdoors. So I'd suggest a tracking number, those that are mailed away should then go on the 4797, those that come in should be added, but at what basis? An allowance for waste might be proper, tho' that wouldn't be a tax item, so GAAP reporting issue. . .

Natalie (talk|edits) said:

July 10, 2006
I have a nonprofit client that set a $250 cut off. That was based on a recommendation for the treasurer who provides tax services to many other clients. I guess the idea behind that was to try to get them to keep track of their furniture and equipment so that they could prepare better budgets. My husband is a photographer, and I capitalize any equipment he purchases that will last more than a year. (I think the lowest is $50.) He doesn't need the deduction, and it allows him to get the Hawaii tax credit on it. Most of my other clients have about a $500 capitalization policy.

ConservativeDC (talk|edits) said:

11 July 2006
"Useful life" is not a matter of interpretation. Paper clips have a useful life of less than one year (and are an expense) because the IRS says it is.

A desk, computer, car, or building has a useful life of greater than one year, also because the IRS says it does. Wishing it were different does not make it so.

In order to avoid pages and pages of depreciation, Section 179 was created and expanded. This way, personal property depreciable items can usually be written off in the first year by most businesses.

This type of fudging can lead to more serious problems in the area of repairs vs. improvements, personal use of a rental property, etc. The rule is the rule is the rule. There are plenty of good ones we can take advantage of--no need too commit tax fraud.

Jake (talk|edits) said:

12 July 2006
Conservative - if I can use Sec 179 no problem. But rental property (apartments, warehouses can't use 179). I agree that a $7 mailbox for an apartment "should" be depreicated, but the IRS isn't going to care - sort of a diminimus rule. We are just debating what is diminimus enough to get by the IRS auditor.

Jake (talk|edits) said:

12 July 2006
Where does it say that paperclips have a useful life of less than one year? NOLO Press has a great book on real estate rental deductions for about $30. Lots of good practical advice. I recommend it to my clients with rental property as it reinfoirces a lot of what I am telling them. They can then make their own decisions as to how far to push the (IRS) envelope.

Jake (talk|edits) said:

12 July 2006
Tangible Perosnal Property Tax - I probably have been ignoring this for years on rental property. So far so good. Perhaps it does not apply in Ohio. All of my present clients would be under the exemption threshold anyway but up until a couple of years ago they still had to file. That has changed - if under the threshold no filoing - which has been a great relief to many small businesses including mine. No longer have to keep a separate set of books for the feds and the personal property tax.

Dude7707 (talk|edits) said:

9 April 2008
Q's RE: T/P owns commerical building (Sch C) who rents to his S-Corp a sheet metal business and has the following building improvements:

1. New Lighting for interior & exterior - 3,841 - CAP Building Improvements - MACRS 31.5/39 NRE

2. Parking Area Paved - 4,857 - CAP Land Improvements - Nondepreciated

3. Front Office Windows - 904 - CAP Building Improvements - MACRS 31.5/39 NRE

4. Fence and Gate Replacement - 4,641 - REPAIR?


Would this be the proper treatment of these transactions?

Only 7 days for the 1st round!

Thanks!

Natalie (talk|edits) said:

April 9, 2008
Without checking the rules, this is my understanding:

1. If new lighting is part of the building, yes.

2. 15 years

3. yes.

4. Probably.

Natalie (talk|edits) said:

April 9, 2008
On second thought, I think replacements are supposed to be treated as like-kind exchanges.

PHIL MOODY (talk|edits) said:

9 April 2008
$1,000 rule here, as long as it is not a "structured" transaction such as 10PC's for $600 each, in which case I would depreciate.

Rental same rule. If part of a remodeling job however, and even though each item may be less than $1,000, we aggregate all to make a depreciation determination.

Donniecastleman (talk|edits) said:

9 April 2008
I saw a return today from Jackson Hewitt that had depreciated a $49 software program over 7 years and a $59 piece of something depreciated over 5 years, I just shook my head and entered it into the asset categories combined with other things bought in 2005, it'll be gone soon.

Fsteincpa (talk|edits) said:

9 April 2008
I tell clients to set limits that are realistic to them. Smaller clients $500, Larger clients $1,000 up to $5,000.

$5,000 is a limit specifically stated in federal guidelines for capitalization purposes.

There is a difference between a capitalization policy and an asset tracking policy.

A worse issue was for nonprofits buying computers and then buying new ones and parts of the old computers het swapped in and out. Tracking for depreciation is a bear. No need.

One thing to always take into account is the cost benefit of each item of advice we recommend. I issue management letters all the time indicating internal control procedures to implement that would benefit the agency, but the cost of implementation outweighs the benefit.

Tracking a $7 desk is redonkulous in my opinion. If an IRS agent came in and wanted it that way, I'd throw his/her ass out of my office and would go so far up the chain of command that he would get fired for wasting taxpayers dollars.

There is law and there is common sense, there has to be a balance.

$500/$1,000 is a good start. I lean towards the higher end.

And grouping things just to capitalize. Me no like.

RoyDaleOne (talk|edits) said:

9 April 2008
I noted that some of us thnking you can not Section 179 rental property. As I recall that is true only for residential rental property, but not for other type of rental.

Natalie (talk|edits) said:

April 9, 2008
How's that again Roy? Do you mean "somehow"?

Fsteincpa (talk|edits) said:

9 April 2008
Roy was responding after it was "Time for Tequila"

RoyDaleOne (talk|edits) said:

9 April 2008
Okay, now for my latest:

The batteries in my wireless keyboard are failing, causing &*9kkj keyb8oad in^4puts.

Natalie (talk|edits) said:

April 9, 2008
It's okay Roy. I can relate. Better get them replaced soon though.

Michaelstar (talk|edits) said:

9 April 2008
Fsteincpa - where do you find "$5,000 is a limit specifically stated in federal guidelines for capitalization purposes" for tax purposes.

I have never come across this and would be very interested in this. Have not come across any $$ amount for that purposes in any federal guidlines but certainly agree with the common sense method.

Fsteincpa (talk|edits) said:

9 April 2008
I will show you on 4/16. federal guidelines in non-profit circular. I will provide. OMB 133 or 128 or one of the other numbers.

Irsfixer (talk|edits) said:

9 April 2008
Donnie, that Jackson Hewitt strategy does several things:

(1) Makes the return cost more due to time or per line entry charges (2) Makes the client copy fatter - justifying a larger fee - add the schedules for AMT and state depreciation and you can really tack on the pages. (3) Makes it more expensive at startup for another preparer to do the return

RoyDaleOne (talk|edits) said:

9 April 2008
Lighting is sometimes considered as not part of the building.

Where is are cost segregation study guy when you need him?

WPCPA (talk|edits) said:

9 April 2008
In my view, and its sad to say, the small independent Sch C Client has more Audit Risk - there a Finish Carpenter working from his Truck may be required to Capitalize and depreciate $200 and more.

Where the Fortune 500 Publicly Traded Corp. can expense a $10-million Subsidiary.

Taxstudent (talk|edits) said:

9 April 2008
Three things:

(1) There is authority for limited expensing under the Court of Claims railroad case regarding the issue. This was followed in Alacare (sp?).

(2) The new proposed capitalization regs create a $100 expensing safe harbor threshold subject to various limitations. Cf Alacare.

(3) Roy, lighting is always a part of the building in the sense that it is attached to it, but it is a section 1245 building component that must use a shorter recovery period when it is readily removable without damage to the underlying building and is not more than incidentally related to the operation and maintenance of the building. This is usually demonstrated by showing that it provides a decorative or other non-building function.

RoyDaleOne (talk|edits) said:

9 April 2008
Please note that the poster said "exterior" which could mean, parking lot lighting (what we used to call street lighting) on a pole and not attached to any building.

By the way does anyone remember when the investment tax credit was first passed by congress during President Kennedy term in office?

I do.

Natalie (talk|edits) said:

April 9, 2008
Uh, you're dating yourself, Roy, but to answer your question, no, I don't. I think Dude needs to come back and provide a few more details.

Irsfixer (talk|edits) said:

9 April 2008
1962

Fsteincpa (talk|edits) said:

9 April 2008
Ted Kennedy was president? wow

Taxstudent (talk|edits) said:

9 April 2008
Pole lighting is a different topic, because a pole (including lighting) may be 1245 by itself, but if it is parking lot pole lighting, SR 95-1263 would say that it is 1250. That old senate report shouldn't matter, except it has become enshrined in several judicial decisions.

RoyDaleOne (talk|edits) said:

10 April 2008
Taxstudent where is your profile?

It matters to me, because, 1. You are annoying, 2. You can not see the joke in anything?, 3. Nor can you read the response to your post that says "yes, but you missed something!", 4. Your dissertations adds almost nothing to the discussion, 5. Everyone here is totally aware of what you say. Therefore, I am go to ignore you, until you fill out your profile.

No response is necessary.

Michaelstar (talk|edits) said:

10 April 2008
Thanks Fsteincpa - I'll look for it.

Natalie (talk|edits) said:

April 10, 2008
Fred, let's go back to the tracking vs. capitalization policy. I'm curious how many of your clients actually have two separate systems. For most of my clients, the fixed asset schedule in the tax return is their asset tracking list.

Fsteincpa (talk|edits) said:

10 April 2008
I found it Michael. As we began our "Midnight Run" last night, my office manager needed some work so I had her skim through the OMB's until she found it. I will post it for you once I get to the office. It is OMB A-122, but you need to understand that this circular is intended as guidance for non-profits and government entities. Now, they are supposed to follow GAAP, which isn't tax law. I probably should have clarified. But, as a tool of reference, it could be used as a guideline where none is stated in the tax regs.

Natalie, my comment was again geared to non-profits where there is no hands on owner. Many do maintain depreciation schedules and then an inventory list of items that should be tracked for both grant and internal recordkeeping purposes.

For the few larger tax business clients I have, I do recommend higher depreciation limits and I do recommend a tracking schedule for all assets, whether depreciated or not. Not saying they follow the advice, but I do recommend it.

Natalie (talk|edits) said:

April 10, 2008
Gee, usually when the east coast guys come on board, it's time for me to get to bed, but you're early today Fred!


So how many of your nonprofits maintain two separate lists? I ask because none of mine do.

Fsteincpa (talk|edits) said:

10 April 2008
A lot of the community action agencies do. See, there is this PIA State agency called DOH that runs the WIC program and they had it in their grant guidelines that programs must maintain an "inventory" of all items purchased that costs more than $200. So, many were required to. I explained to the clients that had a $1,000 limit that while they don't need to for other programs, they should maintain the list for certain types of items. Specifically, computers and equipment and other items/tools that might have a tendency to walk out the door.

What limits do you use for their capitalization limit.

I was thinking that you would be off to bed as I got up today.

Fsteincpa (talk|edits) said:

10 April 2008
Yes, I was early. I prematurely arose.

The tax preparation dreams are beginning. Means the end is near.

RoyDaleOne (talk|edits) said:

10 April 2008
Who is writing the Pubs? I don't profess to have great, let alone good, writing skills, however, the writing in some of the Pubs leaves something to be desired. The logic is worst.

For example, at one point in one of the Pubs the author is trying to differentiate, on the same lot, between a tree planted next to a building and a tree planted next to a fence. Paraphrasing the author, one tree "gets used up", because it is associated with the building, and the other tree does not "gets used up". The other tree is not associated with the building and, therefore does not "get used up". In addition, the Service is still trying to push the concept of a determinable useful life.

Fsteincpa (talk|edits) said:

10 April 2008
Killing kitty here. Hopefully someone knows the quick answer, otherwise I will research.

Client is a trucking company. client bought a new 18 wheeler truck, minus a few wheels cause the trailer part not included.

Anyway, Taxwise had category Tractor - Over the Road. Used this and 3 year life pops up. Can't imagine this is correct. Matbe wrong category. Does someone know this top of head. Other fully depreciated cabs have been 5 years. If no one knows I will pull out search material.

Thanks,

RoyDaleOne (talk|edits) said:

10 April 2008
The position is:

1. 3 year for "over the road" trucks, defined as used outside the metropolitan area.

2. 5 year same truck used inside the metropolitan area.

Fsteincpa (talk|edits) said:

10 April 2008
Just pulled out quickfinder. They list 3 years as well, but no mention of metro/outside metro area.

when they use term Tractor units <for over the road use> they are talking about the cab part of the 18 wheelers right?

Then, they say the trailers are 5 years. any rationale on the 3 year deal for the truck part itself?

RoyDaleOne (talk|edits) said:

10 April 2008
"any rationale on the 3 year deal for the truck part itself?" LOL, roflol.

See for the reference:

Market Segment Papers

Trucking Industry

KristieL (talk|edits) said:

10 April 2008
Tractor units (yes, the cab that pulls the trailer) is 3 years. Depending upon where you drive and the amount of miles put on the semi, it could easily be replaced in three years. Sometimes engines have to be overhauled, etc. in that short amount of time.
 The trailer is 5 years.  
 I have not heard of the metro/outside metro area distinction, but we are in a rural area.

RoyDaleOne (talk|edits) said:

10 April 2008
Direct quote MSSP: Trucking Industry


"OVER THE ROAD -- Transportation by tractor and trailer from one metropolitan area to another metropolitan area."

I believe the actual distinction is based on the old classification of 5 year life trucks are "heavy trucks" like used in a mine, or on construction sites.

Natalie (talk|edits) said:

April 10, 2008
Fred, see waaay above for examples of my clients' capitalization policies.

Trees - I don't think I would depreciate a tree in a parking lot no matter how far it was from the building unless it was a tree that were subject to infestation or wind storms and therefore early termination.

Trucks - or maybe they figure the ones outside the metropolitan area get bounced around more and therefore wear out faster.

Where's Dude? We still need to solve the lighting issue.

Fsteincpa (talk|edits) said:

10 April 2008
Yes, Natalie, but if you were a tree, what kind of tree would you be?

Taocpa (talk|edits) said:

10 April 2008
Hey Fred,

If you fell in a forest and no one were around to hear you, would you still scream for tequila?

tom

Natalie (talk|edits) said:

April 10, 2008
Good one Tom! But we need to find Dude because he was the last one to post a tax question on here.

Michaelstar (talk|edits) said:

17 April 2008
Fsteincpa - Thank you for the site of OMB A-122. But as a point of further discussion on this topic, that OMB is not suggesting that $5,000 is the magical number which you did sort of point out as well.

The OMB states " Equipment means an article of nonexpendable, tangible personal property having a useful life of more than one year and an acquisition cost which equals or exceeds the lesser of the capitalization level established by the non-profit organization for financial statement ourposes, or $5,000."

That is where I feel the basis of this post rests. I have yet to find a site or a reference that makes me comfortable telling a client that every capital item they purchase under xx$ does not need to be capitalized for tax purposes and not be subject to debate on an IRS audit. It seems to be relative to the size of the corporation or business in my mind but even this being the case, what is the cut off $$ amount relative to the size of the business.

A corporation that has gross sales of $1.5 million - is it $500? For a business that has $300K in gross sales is it $250 or even $500? It certainly is not $5,000. I would think that to use $1,000 in my two examples is being agressive and would the client prevail if audited?

If the business has profits and can sec179 the asset, and it is just expensed w/out a sec179 election - does that enter into play. One would think that a busiess would establish a capitalization policy limit and never need to look back.

Natalie (talk|edits) said:

April 17, 2008
Michael, I think the limit would also depend on how many of those items a company has that fall below it. It is one thing to have a handful of items under the threshold and quite another to have a whole bunch of them.

Irsfixer (talk|edits) said:

17 April 2008
I remember a lively discussion I had with an Arthur Andersen manager when I was a kid and working for a Fortune 15 company. We were putting together disclosures for "Current Cost/Constant Dollar" accounting purposes. I had calculated PP&E to be about $15 billion in current cost dollars. AA had calculated it to be about $50 million different. I asserted that it was not material enough to make changes to the 10K at that point - especially since it was experimental disclosures anyway. The manager said to me: "There are two kinds of materiality. The first compares the size of an item in relationship to the entire balance sheet. The second kind of materiality is - $50 million dollars is always material!"

This was the same office that did so well with Enron.

Michaelstar (talk|edits) said:

17 April 2008
Actually Natalie - I would not consider that an issue once a reasonable capitalization policy limit has been adopted. Now, if once a policy has been adopted relative to the size of the business (that is the real question) and the client were to to try to avoid this policy by then purchasing most items to stay under that limit - that would be a problem. Currently I do not have those type of clients so that side of the conversation does not really address the overall concept I am attempting to clarify.

Natalie (talk|edits) said:

April 17, 2008
"Reasonable" is the key, isn't it?

RoyDaleOne (talk|edits) said:

17 April 2008
Actually, I would think it is the expected useful life of the item.

There is additional argument about the cost benefit ratio.

It costs more to track (account for) then the benefit deprived.

And, the old matching theory.

For the largest employer that purchases 10,000 number pencils per year, the ability to track each individual item would be a nightmare. Some may break, some may stolen, some may last for fives, you get the idea.

However, at my firm we could purchase a dozen number pencils and track very one for a year in about two minutes. Look in the desk drawer and get how many are left.

I would think consistence is the most important issue, which is what Natalie is saying.

Okie1tax (talk|edits) said:

17 April 2008
Can't say for sure that nothing has changed since 1995. I was working for one of the baby Bells. One of our main computer systems was strictly for the purpose of tracking inventory of capital items. The largest quantity was in units called plug-ins. Various sizes, various costs, from < $10, to > $40,000. There was an ongoing battle with FCC/IRS etc as to what had to be tracked because the plugins were located in 10s of thousands of offices, poles undergroud vaults, etc., and theoritically? we were supposed to be able to point to each plug-in as to when purchased, when placed into service, when returned to the warehouse, returned to service, disposed of, etc. All the above arguments simply point out that until you really get audited, you can expense whatever you want. The IRS documentation does NOT give a dollar limit, it gives a useful minimum of 1 year.

Michaelstar (talk|edits) said:

17 April 2008
Okie1tax - Your post is exactly the point I have brought up and am prusuing here. Well said! I am in disagreement with the concept of "expense whatever you want" until one is audited which seems to be the consensus of some. I am also in disagreement with set the limit high and limit one's work because tracking all of those assets is not worth the clients money. I consider that line of thinking total hog wash! When and if a client gets the audit notice and the client relied on such advise (because it was provided to save the client some accounting fees in the short run - guess who is going to eat the who thing? Ya - the accountant.

What would be good is if others were able to provide actual audit results based on company size (like yourself) and IRS accepted/audit passed information. Without some clear guidance based on actual audit experience on the subject, I tend to lean towards the side of being conservative. One must be reasonable in their approach and consider the materiality of the limit set. So far, those concepts have only been discussed which are on point. My concept of materiality may be not be as liberal as others but then I hated auditing and stayed on the tax side of public accounting for the past 25 years.

RoyDaleOne (talk|edits) said:

17 April 2008
Generally speaking, the concept of materiality is a GAAP accounting concept and has no similar concept in tax accounting.

During the several hundred IRS audits I have participated in I have never had an issue be raise by the IRS Examiner with a single item below $250.00, and naturally when quantities are greater and or above $250.00 I have had the issue raised.

When Section 179 is available, I would suggest that repairs be capitalized, and very small items, then use the Section 179 election to expense.

Natalie (talk|edits) said:

April 17, 2008
Michael, there was another discussion about depreciation a while ago. Have you looked at that? I recall someone talking about paper clips. There may be information in there that will help you.

Michaelstar (talk|edits) said:

17 April 2008
RoyDaleOne - agreed. Materiality is an audit/accounting concept which depending on who the audit manager/partner was at the time could be used for or against to conclusion at hand. Hated it.

In tax - we have reasonablness as a concept although not necessarily a written concept. Now - your $250 item limit is tangible whether I agree to it or not it is real based on experience. I certainly do not consider a limit of $250 to be unreasonable. I have a few clients that try to push the $1,000 amount and year afer year I have to readdress the issue and force it down to $400-$500.

Yes, Natalie - but you will find, this post is current, I also addressed this concept in this post back in July 2006 and again here in April. Fsteincpa sited an OMB which I just looked up and read because of the very high $$ limit. This concept has yet to have very many hard experience examples posted. It looks like now, there is two. That is what I am looking for and I am sure many others who are following this post would like to see as well.

Natalie (talk|edits) said:

April 17, 2008
Okay, Michael. I didn't realize that other discussion was so old. I think Fred was speaking from a nonprofit perspective. I will refrain from further posts until he has a chance to reply.

Fsteincpa (talk|edits) said:

20 April 2008
I'll be back from tequilaville on Tuesday.  :-)

Fsteincpa (talk|edits) said:

2 May 2008
K, Took some time off after Tequilaville. Recover and get the batteries recharged. No deadlines no until Mid-June, can kick back and put the feet up on the desk. Yeeee haaaaa.

But, now that I am back, time to post a few things. Michael, I do understand your search for that holy grail, unfortunately, I don’t think it truly exists. The only thing that is out there is guidelines and results from audits. Your request for audited results is a good starting point, but irregardless, the argument with the auditor will be one based on reasonableness.

I posted the OMB 122 Guidelines quickly and probably should have stated that these are merely guidelines to be used. That the federal government in dealing with nonprofits and governments allows them to expense capital items that cost less than $5,000, or their own written capitalization policy amount, whichever is lower.

I interpret that to mean that the feds have no issue with expensing items that could be capitalized if they are less than $5,000. There just needs to be a written capitalization policy. Now, just cause the feds put this out there, doesn’t mean the states and other grantor organizations don’t have more restrictive regs.

My point was that even without a $ size amount of organization revenue and expense, the feds put $5,000 out as a hard number to use as a guideline. Yes, under audit, any number over $250 might be subject to a discussion on reasonableness. But, that doesn’t mean the fight is not worth fighting. Our responsibility is to explain all possibilities to our client and let them make that decision. I would recommend that client have a written and consistently followed capitalization policy. I would also make sure they know that the IRS may come in and say nein. Explain our chances of winning that argument and then let client make decision. We are advisors, we advise, they decide course of action. If not illegal, if not contrary to what we are allowed to do, we do.

I have no problem using 1,000 as a limit if client has more than 200,000 in revenue. I explain the difference between the need for capitalizing and the need for tracking from a control standpoint. In today’s economy $1,000 doesn’t go that far anymore.

I don’t think there are any hard and fast rules, just reasonableness in relation to each individual situation. Someone used a great line that was something like “if you are carrying 50 pounds of pot in your trunk, don’t go speeding down the highway in an uninspected vehicle” If you questionable items on the return, then use a lower limit. If not, I’d use the higher reasonable limit if client wishes as long as it is defensible.

Your concern seems to be on the fallout after the audit. Use it as a discussion/education with your clients and let them be part of the decision making process. Really, $250 is a bit low. $2,000 isn’t if we are talking in excess of $1,000,000 in revenue. And, the reasonableness thought process should only come in to play if the price of these items exceed the sec 179 allowed. If items expensed would be ok to 179, and there is limit available, the what’s the fuss?

Just my 3 cents anyhow.

RoyDaleOne (talk|edits) said:

2 May 2008
http://www.bnasoftware.com/knowledgecenter/dtr/article.aspx?id=1092

REG-168745-03 from IRB 2006-39

The latter link provides a good discussion of this issue from the IRS point of view and practice.

Oruiz (talk|edits) said:

3 November 2010
Very useful information, especially when links to the sources are provided. I have been searching for capitalization thresholds but couldn't find anything. I am glad I came to this page and found reasonable answers to my concerns.

Trillium (talk|edits) said:

3 November 2010
You're welcome. Also keep in mind - this was likely the very first hit in your search results, making it the discussion started LONGEST AGO (the search engine here sorts the results oldest first). To see more recent discussions on the topic, check out the discussions toward the bottom of the search results, too. For example: Discussion:Expensing de minimis capital assets

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