Christmas came early this year for small business owners when the IRS announced last Tuesday some great news regarding the de minimis safe harbor limitation. In light of comments received and in an effort to reduce administrative burdens, the IRS increased the de minimis safe harbor limitation for taxpayers without applicable financial statements (AFS) from $500 to $2,500 (Notice 2015-82). The limit for taxpayers with AFSs remains at $5,000.
The final tangible property regs issued in 2013 generally provide that a taxpayer must capitalize amounts to acquire, produce, or improve tangible property, unless rules allowing the deduction apply. The final regs offered an alternative to the general capitalization rule and permitted businesses to elect to apply a de minimis safe harbor for amounts paid for such items. The safe harbor was intended as an administrative convenience to allow taxpayers to deduct small dollar expenditures for the acquisition or production of new property, or for the improvement of existing property, which otherwise must be capitalized under IRC §263(a). For taxpayers without AFSs, the safe harbor threshold was limited to $500 per invoice or per item. For taxpayers with AFSs, the threshold was and still remains to be $5,000. After the final tangible property regs were issued, the IRS received numerous requests to increase the limit for taxpayers that do not have AFSs and subsequently the Service released Rev. Proc. 2015-20 to formally request comments on whether the limit should be increased. The IRS received over 150 comment letters requesting that the limit be raised to suggested amounts ranging from $750 to $100,000. Practitioners and representatives of small businesses argued that the limit was too low to effectively reduce the administrative burden of complying with the new and complex capitalization requirements. In addition, commenters noted that the cost of frequently purchased tangible property such as tablet-style personal computers, smart phones, and machinery and equipment parts often surpass the $500 limit. Commenters also expressed concern about the unequal treatment of taxpayers with and without an AFS under the safe harbor ($5,000 vs. $500), noting that obtaining an AFS is cost-prohibitive for many small businesses and does not adequately justify the significantly lower limit, especially when both small and large businesses are purchasing items that are the same or similar in nature.
As before, the de minimis safe harbor does not limit a taxpayer’s ability to deduct otherwise deductible repair or maintenance costs that exceed the amount subject to the safe harbor, but merely establishes a minimum threshold of which all qualifying amounts are considered deductible.
The new $2,500 threshold is effective for costs incurred during tax years beginning on or after January 1, 2016, but the use of the new threshold will not be challenged by the IRS in tax years prior to 2016. Moreover, the IRS stated that it will not pursue the issue further for any tax year beginning after Dec. 31, 2011, and ending before Jan. 1, 2016, for any case pending in IRS examination, Appeals, or the Tax Court.
The changes to the De Minimis Safe Harbor limits offer small companies additional tax savings. Since the rules governing it’s application is complex it’s imperative to partner with an advisor who can guide you through the process. For more information about the safe harbor regulations and how it will impact your company, call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon!