I was just reminded of this great idea, so I’m sharing it.   One we, as a business, don’t fully employ- because we want to decide over the course of the year whether an item is worth more to us as a deduction this year or next.

But, we do have a “safe harbor” policy in place each year for items UNDER $ 400. Just because it is never clear to us whether an item that costs less than that (but more than $ 75 or so) must be capitalized. And, we don’t want to be on the wrong side of the IRS.

If you want to elect a higher number ($ 2500 or $ 5000), then you should use the documentation we have included, but modify the numbers to match your idea.   Remember- if you choose the $ 2500 (or $ 5000) it means you will use it the entire calendar year. And, that capital items below the value you choose can’t be depreciated at all so that it provides some tax sheltering next year. (This is NOT a pick and choose kind of rule.)

If you elect a cutoff of $ 2500, you don’t need the applicable financial statement (AFS). (However, we suggest you have one anyway. To remind yourself of the policy’s existence, if not to cover one’s assets. Literally.)  Anything over $ 2500 and up to $ 5000, the AFS is not an option- you must have it in place and in writing.

The picture below describes the requirements for an AFS. You will notice it is not highly elaborate.

Now, you still must save the relevant invoice(s), as well as proof of payment (credit card or check) for said item(s) or the IRS will be on your case.

But, this is not the only thing that must be done. When you file your taxes at the end of next year (ok, by March or April of 2018), you must add a special document to your tax return. We (you ARE using us to do your taxes, right?) will add the document below as a PDF attachment to the electronic submission. (Given the number of tax returns we prepare, filing a paper return means there will be an IRS penalty for us. We don’t like penalties- both for the black mark concept and because the payment of a penalty  is not a deductible item. So, all our returns are filed electronically.)

That’s it! It makes your accounting easier- but may cost you if you needed that capital expense write-off in a future year.  So, choose your cut-off threshold carefully.

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