The de minimis safe harbor election of the final tangible property regulations permits taxpayers without an audit to immediately deduct asset acquisitions (or repairs required to be capitalized), provided the necessary requirements are satisfied and a specified dollar threshold is not exceeded. This threshold limit for these taxpayers has been raised from $500 to $2,500.
The final tangible property regulations (the “Repair Regulations”) offer the de minimis safe harbor election, which allows a qualifying taxpayer to immediately deduct the cost of assets that are acquired or produced during the tax year (or repairs required to be capitalized), if certain requirements are met.
In order to qualify for the de minimis safe harbor, taxpayers must: (a) at the beginning of the tax year, have a written policy in place for financial reporting purposes, delineating the deduction of the cost of asset purchases below a certain dollar threshold; and (b) the taxpayer must actually deduct the cost of acquired assets in accordance with this policy.
The safe harbor threshold (i.e. amount that can be deducted) depends on whether or not the taxpayer has an applicable financial statement (“AFS”).
A taxpayer with an AFS may elect to apply the de minimis safe harbor if the amount paid for the property does not exceed $5,000, and the taxpayer treats the amount paid as an expense on its AFS in accordance with its written accounting procedures. This limit remains unchanged.
Previously, a taxpayer without an AFS could elect to apply the de minimis safe harbor if the amount paid for the property did not exceed $500 per invoice (or per item as substantiated by the invoice). This threshold limit has been increased to $2,500. As a result, small businesses will be able to immediately deduct many expenditures that would otherwise need to be spread over a period of years through annual depreciation deductions.
As before, businesses can still claim otherwise deductible repair and maintenance costs, even if they exceed the $2,500 threshold.
The new $2,500 threshold takes effect starting with tax year 2016. In addition, the IRS will provide audit protection to eligible businesses by not challenging use of the new $2,500 threshold in tax years prior to 2016.
Business taxpayers should make sure an appropriate expensing policy is in place for tax year 2016.
For more information, reach out to a member of Withum’s National Tax Services Group by filling out the form below.
Author: CJ Stroh, Esq. | firstname.lastname@example.org