If you’re a small business owner that does not maintain an applicable financial statement, the threshold for commonly expensed items (such as smartphones, computers, machinery and equipment parts) will we be 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. And as many small business owners have noted in letters to the IRS, the costs of commonly expensed items for modern business needs was frequently above the previous threshold.
What is the Tangible Property Expensing Policy, and why wasn’t it commonly used before?
The tangible property regulations, often referred to as “repair regulations,” were issued in early 2014 and provide a general framework for distinguishing capital expenditures from supplies, repairs, maintenance, and other deductible business expenses.
Many taxpayers may not have adopted the $500 safe harbor in 2014 since their expensing policy was a greater amount – say $1,000 per invoice or item. All taxpayers should now review existing expensing policy in light of IRS change to determine if it is advantageous to adopt the higher expensing safe harbor or some other amount up to $2,500. For example, a taxpayer with a $1,500 expensing policy probably would not have adopted the IRS prior $500 safe harbor. Now this taxpayer may wish to formalize the $1,500 policy or increase the expensing policy to $2,000 or $2,500 for 2016.
How do I know if my business qualifies?
An early release of IRS Notice 2015-82 provides that taxpayers may take advantage of generous property expensing pursuant to the IRS safe harbor deminimis rules. These rules applied to taxpayers without audited financial statements. The new safe harbor amount is increased from $500 to $2,500 per invoice or item and is effective for tax years beginning on or after January 1, 2016.
The new $2,500 threshold applies to amounts businesses spend to acquire, produce, or improve tangible property that would normally qualify as a capital item, according to Notice 2015-82 released on November 30, 2015. The threshold also applies to any such item substantiated by an invoice.
Significant tax saving opportunity for businesses to revise their expensing policy
The new rules for 2016 would likely allow expensing of the purchases of computers, tablets, etc. costing less than $2,500 each so long as the purchase invoice details the cost of items appropriately. For example, the purchase of 20 computers detailed as costing $2,000 each would allow for immediate expensing of $40,000 so long as accounting policies are reflective of this treatment for books and records and the safe harbor is elected in tax returns.
To avail themselves of the generous expensing provisions, taxpayers need to have procedures in place to treat such amounts as expense for the taxpayer’s books and records consistent with the tax return treatment.
Each taxpayer’s Federal income tax return should consider the required election for the safe harbor and also maintain a written internal accounting policy with a stated deminimus expensing amount up to $2,500 per item or invoice.
Get guidance on how to implement an Accounting Capitalization Policy for your business
We can provide sample “Accounting Capitalization Policy” statements on request for your review. Contact Paul Simons at firstname.lastname@example.org or (612) 630-5072 for further information.