IRS Allows ISO 9000 Costs DeductionI recently came across an interesting piece of information that I thought would be of great interest to all our clients and email subscribers. The article I read stated that the IRS had issued a ruling that would allow business a tax deduction for the costs of gaining and maintaining their ISO 9000 registration. – This is great news to all the companies who have implemented quality systems as a capital expense with no deductibility. Now you may have a chance to deduct these expenses. "It's hard to overstate the impact here," says Michael Baroody, senior vice-president of policy, communications and public affairs for the National Association of Manufacturers (NAM). "Registration is expensive. Losing this deduction would add to those costs by increasing tax bills, and for small businesses, that could result in a serious cash-flow problem. Some small businesses need ISO 9000 registration just to survive--their major customers require it." NAM, the National Federation for Independent Business and other organizations petitioned the IRS in 1998 to permit businesses to deduct ISO 9000-related costs in a single year instead of spreading them out over several years. In a joint letter, the organizations described the registration process as "both expensive and time consuming, particularly for small businesses." Section 162 and section 1.162-1(a) of the Income Tax Regulations generally allow a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year. The courts generally have construed section 162 as containing five conditions that an expenditure must meet to qualify for deduction: The expenditure must be (1) an expense, (2) ordinary, (3) necessary, (4) paid or incurred during the taxable year and (5) made to carry on a trade or business. The new determination that ISO 9000 registration is often necessary is, in part, responsible for this policy change. "Although ISO 9000 registration is voluntary, it increasingly is a contractual requirement for doing business with many organizations, both public and private, worldwide," noted the IRS ruling. "ISO certification also is an alternative to product certification in some foreign markets, particularly the European Union." A previous unofficial IRS position paper concluded that all internal and external costs associated with the initial ISO 9000 registration process, as well as subsequent re-registration audits, were required to be capitalized (deducted over a three-year period) because the resulting competitive advantage would likely exist for longer than the one-year period. "ISO 9000 certification does not itself result in the creation of an asset having a useful life substantially beyond the taxable year," according to the new IRS ruling. Exceptions to that rule (such as the costs of creating a quality manual and purchasing new machinery and equipment), however, still must be capitalized because they result in the creation of an asset. I would recommend before you take any deductions that you contact your tax advisor to determine which ISO 9000 registration and maintenance expenses are deductible for your organization. |