IRS raises safe-harbor expensing ceiling to $2500 for some taxpayers
December 11, 2015
What is it?
In late November, the IRS increased the de minimis safe-harbor amount for expensing certain costs instead of capitalizing them from the current $500 to $2,500 for taxpayers without an Applicable Financial Statement (AFS). This de minimis safe-harbor is effective for costs incurred in tax years beginning on or after Jan. 1, 2016, but it requires a change in the taxpayer’s capitalization policy before year end to take advantage of the higher ceiling.
Until this ruling, the Tangible Property Regulations (TPRs) require businesses to generally capitalize amounts paid to acquire or produce a unit of property. However, businesses may elect to apply the de minimis safe harbor if (in addition to other requirements) the amount paid for the property is $2,500 or less (or per item as substantiated by the invoice).
How do I elect?
A taxpayer without an AFS (“non-AFS taxpayer”) must meet the following requirements to elect the de minimis method:
- Before the first day of the tax year, the taxpayer must have accounting policies in place that define what items will and will not be capitalized on the taxpayer’s books and records.
- The costs which are identified as de minimis must be expensed and not capitalized on the taxpayer’s books and records.
- If a taxpayer meets the above criteria, the taxpayer must attach an election to his or her tax return for each year he or she wants to use the safe-harbor protection.
To take advantage of the new de minimis safe-harbor amount, taxpayers must change their policy before the end of 2015. While this policy does not have to be written, AGH’s tax professionals strongly recommend that any taxpayers adopting the new safe-harbor limit make the policy change in writing.
Note that the new de minimis safe-harbor amount does not affect what the taxpayer’s safe-harbor limit was for tax year 2015 as that amount should have been established before Jan. 1, 2015. However, the IRS indicates that for taxable years beginning before Jan. 1, 2016, if non-AFS taxpayers expensed qualifying amounts up to $2,500 under the de minimis election, they will generally not take issue.
The de minimis safe harbor does not limit a taxpayer’s ability to deduct otherwise deductible repair or maintenance costs of more than $2,500. It simply provides a new minimum threshold below which all qualifying amounts are considered deductible and can be expensed. For taxpayers with an applicable financial statement, the de minimis or small-dollar threshold remains $5,000.
What if I have questions?
For more information, contact your AGH professional or AGH senior vice president of tax services, Shawn Sullivan using the contact information below.
Senior Vice President
Shawn serves as one of two primary leaders in the firm’s large tax group. He has extensive public and private experience in the fields of tax and accounting and works frequently with clients in the manufacturing, wholesale/retail distribution, real estate development and management, construction, and contractor industries. In addition to enhancing business performance to minimize tax consequences, he has experience in mergers and acquisitions and international tax and business structuring.
A certified public accountant, Shawn is a member of the American Institute of Certified Public Accountants, the Kansas Society of Certified Public Accountants (KSCPA) and chairs the KSCPA Committee on Taxation.
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NOTE: Any advice contained in this material is not intended or written to be tax advice, and cannot be relied upon as such, nor can it be used for the purpose of avoiding tax penalties that may be imposed by the IRS or states, or promoting, marketing or recommending to another party any transaction or matter addressed herein.