By Jeff Baker
In the past, most taxpayers, using the cash basis of accounting with farms, businesses, and rental property, would deduct incidental and non-incidental materials and supplies when they paid for them.
Non-incidental material and supplies are items that have a useful life of more than one year, such as cell phones, calculators, hand tools, and small computer equipment. This was the standard process, even though the law said you were supposed to deduct non-incidental materials and supplies when you used them.
However, new IRS regulations are changing how non-incidental material and supplies are being accounted for. In this post, I'll offer my understanding of the regulations and how the changes impact your farm.
De minimis Safe Harbor election
The final regulations that were issued in January of 2014 created a De minimis Safe Harbor Election, 1.263(a)-1(f), which allows taxpayers to deduct invoices for non-incidental material supplies below $500 in the year they are paid for, but it requires that invoices for these items above the $500 threshold be capitalized and depreciated. The rules look at each invoice.
To make this election, taxpayers are required to attach an election statement to their 2014 tax returns. If they do not make the election, they are required to capitalize all non-incidental expenditures above $200.
If the taxpayer is large enough to have audited financial statements or file with the Securities Exchange Commission, he or she can raise the threshold to $5,000 before having to capitalize and depreciate the items.
Regulation 2015-20 requested comments on whether the $500 amount should be raised, but as of Feb. 17, 2015, the limit for most taxpayers is $500 per invoice.
Related: How to defuse the deferred tax bomb
It is important that taxpayers make the required elections by the due date of their tax return plus extensions (October 15th for most 1040 filers). If you have already filed your return, you can file a superseding tax return along with the required elections.
Jeff Baker, CPA, CFP, CSA, M.S. Financial Planning, is owner of Baker Retirement & Wealth Management, 866-244-3517.
Readers should not act upon the presented content or information without first seeking appropriate professional advice. This article is provided for informational purposes only and does not reflect the opinions of Farm Progress.