Update on IRS Tangible Property Regulations: Safe Harbor

EXPENSING VS. CAPITALIZING AND DEPRECIATING

marensBy Michael J. Arens, CPA

Summary

The IRS has announced that it will raise the de minimis safe harbor deductible amount for purchases of tangible property by taxpayers without applicable financial statements (AFSs) to $2,500 per item, an increase from the $500 amount previously in place.

This means that anything under $2,500 can be expensed and does not need to be placed on the taxpayer’s depreciation schedule.

 

Background

Under the new tangible property regulations issued and in effect as of January 1, 2014, taxpayers could elect to deduct expenses for the purchase of tangible property that would otherwise have to be capitalized.  For taxpayers without AFSs, that deduction was limited to $500 per invoice or item.  For taxpayers with an AFS, the deduction limit was $5,000.

On November 24, 2015, the IRS issued Notice 2015-82, which revised the regulations to increase the de minimis safe harbor limit to $2,500 per invoice or item.  Taxpayers can now elect to deduct expenses up to $2,500, where in the past those expenses would have been capitalized.  The de minimis limit for taxpayers with an applicable financial statement remains at $5,000.

The new $2,500 de minimis amount applies to costs for tax years beginning on or after January 1, 2016.  However, the IRS will not raise the issue of a higher deduction amount during an audit for earlier tax years and will not further pursue the issue for any tax year beginning after December 31, 2011 for any case pending IRS examination, Appeals, or the Tax Court.

As a reminder, to utilize the de minimis election, businesses must revise their written accounting procedures to comply with the new regulations as of January 1, 2014. A capitalization policy stating the chosen de minimis threshold regarding capitalizing or charging to expense must be kept in your business or personal records. This threshold will be followed for both book and tax purposes. If you’d like a copy of an appropriate accounting procedure template, we would be happy to provide one for you.

 

Should you have any questions or concerns, please contact our office at (402) 423-4343 at your earliest convenience. As always, our team of trusted advisors is here to help.

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