The following blog post from SC&H’s Tax Services team discusses a recent change to the de minimis safe harbor threshold for expensing fixed assets, providing small businesses with the info to take advantage of this key tax-saving opportunity.
The IRS’s September 2013 release of the Tangible Property Regulations (T.D. 9636) was a significant milestone, as it finally quantified a minimum threshold to be applied when determining whether a fixed asset should be capitalized or immediately expensed.
However, while the inclusion of a de minimis safe harbor election allowed taxpayers to avoid capitalization of certain expenditures, several restrictions limited its value for small businesses.
No more. With the release of Notice 2015-82, the IRS amended the safe harbor in a way that should allow more small businesses to immediately deduct more costs—beginning with those incurred in the 2016 tax year.
The Original Rule: Limited Benefit for Certain Small Businesses
Under the original rule, the de minimis safe harbor allowed taxpayers with an “applicable financial statement” (generally, a certified audited financial statement) to deduct all amounts properly expensed up to $5,000 per invoice or item.
But, the regulation limited small businesses, who typically don’t have audited financial statements, to a much smaller deduction. These taxpayers could apply the de minimis safe harbor only if the amount paid didn’t exceed $500 per invoice or item. In addition, it required them to have a written accounting policy and procedures in place for expensing amounts paid for property that:
- Cost less than a certain dollar amount, or
- Had an economic useful life of 12 months or less
If the cost exceeded the threshold or the taxpayer didn’t have a written policy and procedures in place, no portion of the fixed asset amount fell within the safe harbor. In this case, the taxpayer had to either:
- Capitalize the expense, elect the Section 179 deduction, and risk recapture later, or
- Expense the property anyway and risk a challenge if audited by the IRS
The Revised Rule: An Increase in the De Minimis Safe Harbor Threshold
Effective for taxable years beginning on or after January 1, 2016, the IRS has increased the de minimis safe harbor threshold from $500 to $2,500 per invoice or item for taxpayers without applicable financial statements. For example, if a taxpayer buys 10 pieces of equipment, each with an installed cost plus taxes of $2,450, they would deduct the entire $24,500.
The change also comes with audit protection. The IRS will not challenge the deduction if:
- The amounts can be substantiated with an invoice
- The taxpayer has procedures in place to treat the item the same for tax and books
- The taxpayer includes the appropriate election in their return
Under the recent changes, an expensing policy is required in writing only if you have an applicable financial statement. For these taxpayers, the threshold remains at $5,000. Nonetheless, it is advisable to have a written policy and procedures in place, as they could help you make the case that you were entitled to make the safe harbor election.
Want to learn more about if and how your business can benefit from the revised rule or other recent regulatory changes? Contact SC&H’s Tax Services team here.
