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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22769
Experience:  Taxes, Immigration, Labor Relations
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Are you familiar with the new repair reg, particularly on materials

Resolved Question:

Are you familiar with the new repair reg, particularly on materials and supplies?
Submitted: 10 months ago.
Category: Tax
Expert:  Lev replied 10 months ago.

Lev :

Hi and welcome to our site!
Do you mean any specific requisitions?

Customer:

just on reg 1.162-3

Lev :

Let me verify...

Customer:

i understand we can choose de-minimis on materials and supplies

Customer:

i am confused about the $200 rule on M&S and the $5000 threshold per invoice per item for de-minimis safe harbor

Lev :

Here is the latest update as I could see - http://www.irs.gov/irb/2012-14_IRB/ar05.html

Customer:

that is the old rule, before the final repair reg T.D. 9636

Customer:

if you don't know the answer, that's fine

Customer:

this question may not be suitable for the $16 charge

Lev :

Let me take a look at T.D. 9636... give me a sec...

Lev :

I see - it was released in September - http://www.gpo.gov/fdsys/pkg/FR-2013-09-19/pdf/2013-21756.pdf

Customer:

yes

Lev :

what exact is the item of your concern?

Customer:

we purchased supplies for $200 each, a total of $20,000. under materials and supplies, this $20K is deductible during the year used

Customer:

but if we elect de-minimis rule, we have AFS, can we also deduct the $20K during the year used?

Customer:

(FYI, if we have AFS, the de minimis rule is $5000 per item per invoice)

Customer:

the reg has a lot of examples, but i am still confused!

Lev :

In general - we may expense the cost for materials and supplies only in the amount that was actually consumed and used in operation during the year - that was not changed.
The de minimis safe harbor was part of the previous regulation - what changed - (1) the threshold increased from $100 to $200 and (2) the de minimis safe harbor is and simplified.

Customer:

yes.. i know that

Customer:

this is the fact:

Customer:

we have AFS, and our threshold to capitalize is $1000 for books purpose.

Customer:

in my example above, if we choose the de minimis election, can we deduct the $20K?

Customer:

in other words, if we choose the de-minims election, will all materials and supplies be expensed when used?

Customer:

no matter how big the expenses are?

Lev :

If materials and supplies were actually consumed and used in operation during the year - You do not need the de minims rule.
You would only use that rule when some are not used - but because of accounting practice you still want to expense that cost instead of carrying inventory.

Customer:

ok... so your understanding is to elect de minimis rule only for unused portion?

Lev :

No - if you choose de minimis rule - you will need to consider the total amount of expenses because of limitations. If the total amount is above the limit - you will not be able to use the de minimis rule.

Customer:

ok.. in my example above, i can do 2 options: 1. i can still expense the $20K as materials and supplies because each costs $200 and 2) i can also elect the de-minimis and expense the $20K because each is less than my threshold of $1000. is this correct?

Lev :

Some companies have internal policy based on $5,000 threshold and if so - may elect and use the safe harbor. When your expenses exceed $5,000 - you still can follow that policy, but will make your books open fro the audit. There will be anti abuse policy - and it is not clear for me how that would work.

Lev :

See page 5 - http://www.gpo.gov/fdsys/pkg/FR-2013-09-19/pdf/2013-21756.pdf


Under either procedure, if the cost exceeds $5,000 per invoice (or item), then the amounts paid for the property will not fall within the de minimis safe harbor. In addition, an anti-abuse rule is provided to aggregate costs that are improperly split among multiple invoices.

Customer:

i re-read reg 1.162-3, and found example 14, which helps me answer my question above.

Customer:

i appreciate your trying to help, though.

Lev :

See also - ...a new safe harbor determined at the invoice or item level and based on the policies that the taxpayer utilizes for its financial accounting books and records. A taxpayer with an applicable financial statement may rely on the de minimis safe harbor under § 1.263(a)–1(f) of the final regulations only if the amount paid for property does not exceed $5,000 per invoice, or per item as substantiated by the invoice.
So the application of the de minimis safe harbor should be based on internal policy which must satisfy an anti-abuse rule - see page 28 and examples.

Customer:

the rule is too complicated for my simple brain, but i appreciate your help.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22769
Experience: Taxes, Immigration, Labor Relations
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