Expensing Policy for Low Cost Items

[Bees Knees]

A question from the “other” board deals with the issue of the de minimus depreciation for low cost articles. For example, say you buy a $150 phone for your office. Are you going to bother putting that under Section 179 to write the whole thing off? Or depreciate it over 5 years? Or lump it into office supplies and call it something else because it is too low cost to bother with?

The “other” book dealt with that issue in 2003, but deleted the info in 2004 due to space limitations.

Court cases that have dealt with the issue are split; sometimes allowing for an expensing policy, and other times rejecting the concept of an expensing policy. Personally, I just throw everything under section 179. I figure, that’s what its for, to expense all depreciable assets that are too numerous and low cost to throw on the depreciation schedule. Plus, now that the maximum 179 deduction is over $100,000, most clients aren’t going to use it up with a few thousand dollars in miscellaneous office supplies and equipment.

Any thoughts on an expensing policy? Do you throw those things under supplies, or do you lump them all together and take the 179 deduction?

[WhiteOleander]

Well, if it really isn't something that will last less than a year, I usually do Sec 179. That way no problem if there is an audit.

But, if there isn't an overall profit to sustain the sec 179, I don't like to create a Sec 179 carryover. So, then I have to decide if I can expense them or if they require depreciation.

Running a loss is the biggest problem I find in trying to use Sec 179.

[S T]

Expense vs Depreciation

Any thoughts on an expensing policy? Do you throw those things under supplies, or do you lump them all together and take the 179 deduction?

An IRS auditor once shared with me that it was refreshing to see that cell phones, telephones and fax machines, tables, etc. (usually all under $200-$300 per item ) were being entered as a Sect 179 expense as opposed to being lumped in with other office supplies/expenses, and that was the correct way to present on the tax return. I feel that this factor assisted in the result of a "no change" on the audit of this particular tax client.

So when I come across these purchases in the clients files, I will usually Sect 179 as opposed to including in the overall "office expense" category.

Sandy

[Snaggletooth]

OddBall

I guess mine will be a non-synoptic (ooops! "OddBall") response.

I never claim any type Depreciation on ANYTHING under $200. Not even
Sec. 179. This stuff is just too trivial even for an IRS auditor, unless a
large fungible lot of such items that pose a large amount of money in the
aggregate.

I usually use accelerated depreciation of DD for MACRS items and
Sec 179 for those who make cash purchases (not borrowed money) and
who really need their taxes lowered for the year in question.

And my reason will really set sour with some of you. I believe it is against
sound business practice to "reap where you haven't sown." Yes, I KNOW
I can lower their taxes in any given year, but from the proverb, here is where
people "reap where they haven't sown."

1. Taking Section 179 on borrowed money instead of cash purchases.
They are getting their taxes lowered by more than their outlay of cash
when this happens. Sounds good, but what about NEXT YEAR? They
get NOTHING - no cash savings on taxes but still have to pay interest
and principle on the borrowed money. Tax planning should be balanced,
as taxes become very costly by up-and-down years. In fact, I believe
when s.179 started, it was not available for anything except cash purchases
2. Taking Section 179 on expense items - and then forgetting about it.
Convenient indeed. This runs against what I tell clients about accounta-
bility. When a customer adds a piece of equipment I tell him that as long
as he has that equipment, the IRS is interested in it. I put that piece
on an equipment list, even if it is section 179. The customer has to
review all his equipment every year and assure me that he still has it.
I report salvage sales on equipment that he says he "just doesn't have any
more" unless he tells me he disposed of it in another manner (donation, etc.)

Sound harsh? Some of you may think so. But what about when he sells
some really old equipment for more than he paid? I'm able to get capital
gains for him. Sometimes these folks just simply die -- their families are
grateful to me beyond belief for furnishing them a list of equipment.

Old-fashioned? Judge me as you will --- Regards, Ron Jordan

[JG EA]

A matter of degrees.

So, many things are a matter of degrees. I know that over 1 year means depreciation. But in my mind it has to qualify as an asset. Supplies in our business mean paper, client supplies, etc. But, I would definitely include my new $12.00 stapler as a supply. Not because of any dollar limitations, but because it "feels" like a office supply.

However if my business required 250 $12.00 staplers, I would depreciate them because it would feel like a group of assets.

Yearly tax programs cost a lot of money, but their useful life is less than one year. True my 1999 program is occationally used, but by definition yearly programs have to be replaced every year. But, I do not lump these things, they receive their own line on the tax return.

I do the same thing on a client's return. If they run a small Sch C. and things fall into neat categories, yet there is something that doesn't fit into the supply category, I will depreciate it. Conversely, it they buy tons of low cost pieces of equipment, I may consider an item that may or may not last a year as a supply. (e.g. client buys 3 computers, 3 printers, 6 cords to connect it all up. I will depreciate the computers, the printers, but not the cords.)

It also has to be reasonable, manageable. How would someone keep track of 6 cords. Would you label them, so you could remove it from your asset list, when you rearranged the furniture? Would you go over your asset list with your client and ask them if they still have the 6 cords? Some pens last more than 1 year, unless you put them out for the client to use.

So, this isn't scientific, it is art.

[Bees Knees]

Expensing policies are not law, but they are indirectly allowed by IRS. I have heard auditors say that they only look at the things that will make a substantial difference in tax. For example, if I can waste 20 minutes arguing with an auditor over why he or she should let me expense that $12 stapler, then that is 20 minutes of time we are not looking at inventory valuation.

Obviously, auditors know this. That’s why they let the $12 staplers get lumped in with office supplies without ever saying anything about it.

There was an IRS notice last year where they wanted public comment on this issue. They said they might come out with regulations to deal with it. I believe a reasonable approach would be to set a dollar cap on items that can fall into this category. Say something like anything under $200 is not material and therefore not a depreciable asset.

[Gretel]

Expensing Policy

I'd like an expensing policy very much. In Germany - long time ago - you already could expense anything under about $400.

In my praxis I kind of do the same thing as Ron (Why are you so worried about our judgement?). It all needs to make economic sense but if a client insists I just educate him. He is the boss.

If I see a client might need some depreciation down the road I will depreciate items under $100. And sure enough I will do this for a client with losses. I try to look at each client separately.

For clients where it doesn't matter, an expensing policy would be great. A gear up speaker once said he always puts the full amount posted to the office expense account on 179 to be safe. He doesn't even look at the details. Now that you can amend a return and claim Sec. 179 after the filing deadline it shouldn't matter any more, right?

[abby]

Rentals and other issues

We have struggled with this issue in our firm for sch E property - where sec 179 is not an option. Folks here argue that anything from $250 to $1000 should expensed as repairs rather than depreciated over 5 years, let alone 27.5 or 39 years.

I prefer to list the appliances, flooring, etc, no matter how much they cost (although often grouped by category), especially since it can be done over 5 years now.

Unless there is a full remodel of some part of the property underway, it is often difficult to breakdown a true repair from an improvement without quizzing the client on every item - and most often they aren't going to remember if a Home Depot receipt was part of installing a new sink or fixing a doorknob - in which case dollar amount can be the only way to make a reasonable call.

For sch E and C, one of my litmus tests is whether there is value to the item on a secondary market. I would say no for a $12.00 stapler, but, then, maybe yes for a gross of staplers. Furnishings and appliances are easier to sell than equipment, so I would want to be able to identify these items in case they are sold before the end of their depreciable life. It'll always be a balancing act of current expedience vs possible future entanglements.

Lumping sec 179 items together seems fine - and we have done that plenty of times, until something gets sold before its time and there are recapture issues. That's why I try to determine what is a candidate for later sale before deciding what to include in a group of assets.

Some expensing guidelines would be very welcome!

[dyne]

expensing

Section 179 items are NOT supposed to be lumped into one item. On rare occassions
I have lumped them but this is technically not correct.
Supplies are NEVER required to be included in inventory. Therefore supplies is a good
place to enter small assets which normally should be depreciated. Of course IRS
knows this and scrutinizes supplies during audits.

[Bees Knees]

Section 179 items are NOT supposed to be lumped into one item. On rare occassions
I have lumped them but this is technically not correct.

Actually, that is not true. Section 179(d)(1)(A)(i) lists tangible property to which section 168 applies as being eligible for the Section 179 deduction. Section 168(i)(4) allows you to lump all assets into one general asset account. So by lumping all small items into one general asset account, you can take the 179 deduction without having to list everything out separately on the 4562.

[dyne]

more expensing

Thanks Bees Knees but it appears to me that the IRC Code 168(i)(4) only allows a
General Asset account to be established and does not overide the reguations which
require that each asset expensed under Section 179 be specified.
The code is the law but the Regulations carry more authority since the Regulations
interpret the Code and it's meaning. IRS Regulations 1.179-1 and 1.179-4 and specifically
TD 2005 paragraph 47,049 and TD 2009(ii) states: Any election under Section 179 must
specify the items of Section property...And this is a reiteration of the regulations dated
only about two months ago. Quickfinder Handbooks for several years back say
"Section 179 election is made on an item-by-item basis...
.

[Bees Knees]

What does item by item mean? How detailed does it have to be?

You don’t need to quote regs to find that rule. Its right in the code at Section 179(c)(1) where it says: “An election under this section for any taxable year shall specify the items of section 179 property to which the election applies and the portion of the cost of each of such items which is to be taken into account under subsection (a).”

That’s fine. I have no problem with that rule. But what do you think that rule means? That I have to write down the technical name of each and every asset? How descriptive do you want me to get? Shall I write down: “Dell Dimension 9100 with a Pentium 4 Processor 630,” or can I just say “new computer?” If I just say “new computer,” how did I specify it from the “Dell Inspiron 9300 with a Pentium M Processor 740” that I also purchased but decided not to expense? How about if I just specify each computer as New Computer #1 and New Computer #2?

And if it is OK to just say “new computer #1,” can I lump in the Dell Photo All-In-One Printer 962 that I purchased at the same time under the same invoice with the same check? Or does that require a second election line on the 4562?

I think the problem when it comes to interpreting codes and regs is that people get hung up on words. What is the definition and the meaning behind the words used to describe the rules. Did Congress really intend for us to specify each individual item that could be purchased separately along with its technical description?

To answer that, you need to understand why Congress wrote that rule into the law. The Section 179 deduction was to allow taxpayer’s the freedom to pick and choose what items they wanted to expense and what items they wanted to depreciate. Not only that, but you can expense a portion of an item and depreciate the rest. And with the latest round of tax rules, Congress also decided to take the IRS out of the picture and not make taxpayers have to ask permission before they can change for revoke an election.

You also have Congress coming up with this General Asset Account election in Section 168(i)(4) that allows you to simply lump all purchases from a specific asset class into one account and call it “2005 Office Equipment,” Or “2005 Office Furnishings” or something along those lines to remove the administrative burden of listing each item out separate on the depreciation schedule. Section 179(d)(1)(A)(i) says items that can be expensed are tangible personal property described in Section 168.

Section 168 says you can lump a whole bunch of stuff into one General Asset account and call it one asset. Why can’t I specify one of those General Asset accounts as an item I wish to expense under Section 179? What rule says I can pick and chose any asset, and any portion of an asset to expense under 179, except an asset described in Section 168(i)(4)? I buy a whole bunch of office equipment, like calculators, staplers, stapler removers, pencil sharpeners, etc., all kinds of stuff that will last more than one year. But it would be ridiculous for me to have to list each and every little item out separately on a depreciation schedule. So I decide to lump them all together and call it General Asset Account #1, along with backup to trace and identify each specific item that was thrown into that account. Now, on the 4562, I specify the specific item I am expensing by identifying the item as “General Asset Account #1.”

The provisions of Section 179 were set up to allow taxpayers the greatest amount of freedom to pick and choose which assets and which portions of assets to expense rather than depreciate. The rules were not meant to add administrative burdens on the taxpayer to have to list out extensive details and descriptions of the specific components that make up each and every asset expensed.

I think under examination, the specification rule would be satisfied as long as the taxpayer can substantiate and identify each specific item that is being expensed from the specific items being depreciated.

[Bees Knees]

Not to get ridiculous here, but last night I finished a return for a client and expensed 2 new lamps for his office in home. I don’t know if they were purchased at the same time, or whether they were identical. Maybe one was a floor lamp and the other a desk lamp. Should I have told my client to break out the cost of each specific lamp so that I could list them separately on the 4562 for the 179 election? Is that really what Congress intended when they said the 179 election should be an item by item election?

Would an auditor make me go to appeals to argue the issue? Would appeals make me go to court to argue the issue? I doubt it.

[JON]

Office expense

The lamps should have been office expense......... You would not go to tax court for that. They do not care..

[New Guy]

How can you know they should be office expense when there cost has not been stated? These could be very nice lamps costing hundreds of dollars each with a useful life of many years.