The Internal Revenue Service (IRS) has increased the de minimis safe harbor threshold for deducting certain capital expenditures from $500 to $2,500. This move, which takes effect for tax year 2016, should greatly simplify the paperwork and recordkeeping requirements for small businesses.
This change applies to funds spent to acquire, produce or improve a tangible unit of property (UOP) that would normally qualify as a capital item. It affects businesses that do not maintain an applicable financial statement (AFS). The new, higher threshold applies to any such item substantiated by an invoice.
Before, small businesses would have to spread deductions of these expenditures over a period of years through annual depreciation. Now they can be deducted immediately.
IRS Commissioner John Koskinen stated the change came about as a result of comments from taxpayers and the professional tax community – evidence that your feedback can produce results. “This important step simplifies taxes for small businesses, easing the recordkeeping and paperwork burden on small business owners and their tax preparers,” he said.
The de minimis safe harbor applies to an amount paid during the tax year to acquire or produce a UOP, or acquire a material or supply, only if:
- The taxpayer has, at the beginning of the tax year, written accounting procedures treating as an expense for non-tax purposes amounts paid for property (1) costing less than a specified dollar amount; or (2) with an economic useful life of 12 months or less;
- The taxpayer treats the amount paid for the property as an expense on its AFS (such as a financial statement required to be filed with the Securities and Exchange Commission, or a certified audited financial statement accompanied by an independent CPA’s report and used for credit or reporting purposes) if it has one – or on its books and records if it does not – in accordance with its accounting procedures; and
- If the taxpayer has an AFS, the amount paid for the property does not exceed $5,000 per invoice (or per item as substantiated by the invoice), or if the taxpayer does not have an AFS, does not exceed $500 per invoice (or per item as substantiated by the invoice), or other amount as identified in published IRS guidance.
The change does not affect deductible repair and maintenance costs, which businesses can still claim even if they exceed the $2,500 threshold. For taxpayers with an applicable financial statement, the de minimis or small-dollar threshold remains $5,000.
Follow this link to the IRS website for more details on the change.
If you want an analysis of how these new tangible property expensing thresholds could affect your company, please call Liz Belcher in our Tax Services department at (317) 613-7846 or email [email protected].