Depreciation: IRS Regulation Rewrite Rules on Deduction vs. Capitalization


Depreciation has been around forever and we all thought we knew everything about it.  Well maybe not, but the IRS has updated the rules on “capitalization”, “facilitative costs” and “de minimis rules”.

CAPITALIZATION:  A taxpayer must capitalize amounts paid to acquire or produce real or personal property, including leasehold improvement property, land and land improvements, buildings, machinery and equipment, and furniture and fixtures.  The taxpayer also must capitalize costs for work performed before the date that the unit of property is placed in service by the taxpayer.

FACILITATIVE COST:  Amounts paid to facilitate the acquisition (or production) of real or personal property, i.e., paid in the process of investigating or otherwise pursuing the acquisition must be capitalized.  Facilitative costs include:

  • Shipping
  • Moving or appraising property
  • Application fees
  • Sales and transfer taxes
  • Finder’s fees
  • Architectural
  • Engineering
  • Environmental or inspection services related to the specific property
  • Brokers’ or appraisers’ fees
  • Services provided by an qualified intermediary in a Code Sec 1031 exchange

DE MINIMIS RULE:  Under the de minimis rule of the regulations, amounts paid to acquire or produce a unit of real or personal property do not have to be capitalized if:

… the taxpayer has an applicable financial statement (AFS), such as a certified audited financial statement accompanied by an independent CPA’s report and used for credit or reporting purposes;

… the taxpayer has written accounting procedures in place at the beginning of the tax year for expensing amounts paid for such property under certain dollar amounts;

… the taxpayer treats such amounts as expenses on its AFS in-accordance with its written procedures: and

… the aggregate of the amounts paid and not capitalized under the de minimis rule for the tax year are less than or equal to the greater of (1) 0.1% of the taxpayers gross receipts for the year as determined for federal income tax purposes; or (2) 2% of the taxpayer’s total depreciation and amortization expense for the tax year as determined in its AFS.

These rules might sound too technical.  However, you should have some idea as to what needs to be capitalized when you acquire assets.  Your ShindelRock tax professional can help you walk through your specific situation.