The IRS has issued new Notice 2015-82, which provides a significant benefit to small businesses under the tangible personal property repair and capitalization regulations. The IRS increases the amount that can be deducted under the de minimis rule for those without an Applicable Financial Statement, from $500 per item to $2,500, where certain conditions are satisfied. This includes a requirement that an election to use this safe harbor must be made on a timely filed tax return.
Under the regulations, the de minimis safe harbor applies for those without an Applicable Financial Statement (AFS) to amounts paid during the year only if:
- The taxpayer has, at the beginning of the year, an accounting policy treating as an expense for non-tax purposes the amount paid for property (i) costing less than a specified dollar amount; or (ii) with an economic useful life of 12 months or less;
- The taxpayer treats the amount paid for the property as an expense on its books and records, in accordance with its accounting procedures; and
- The amount paid for the property does not exceed $500 per invoice or per item, as substantiated by the invoice.
Similar rules apply for taxpayers with an Applicable Financial Statement except that there must be a written policy at the beginning of the year, and the amount deductible is $5,000 per item.
An AFS is (i) a financial statement filed with the SEC; (ii) a certified financial statement; or (iii) statements required to be supplied to a government regulator other than the IRS.
The Service believed that the higher $5,000 amount for taxpayers with Applicable Financial Statements was justified since the financial statement provides independent assurance that the taxpayer de minimis policies are consistent with GAAP and do not materially distort the taxpayer’s financial statement income. However, the comments received convinced the Service that the $500 limit was too low to effectively reduce the administrative burden of complying with the capitalization rules for small business taxpayers. Most of the commonly expensed items (e.g., tablet-style personal computers, smart phones, and machinery and equipment) typically surpass the current $500 per item or invoice threshold. Additionally, the $500 level does not correspond to the financial accounting policies of many small businesses, which commonly deduct amounts in excess of $500 as being immaterial. Finally, the commenters noted that the cost of obtaining an AFS, so as to get the benefit of the higher $5,000 de minimis level, can be cost prohibitive.
Under the new Notice, IRS raises the de minimis limit for a taxpayer without an AFS from $500 to $2,500. The increase is effective for costs incurred during tax years beginning on or after January 1, 2016. However, the IRS also states that it will not raise the issue under examination as to whether a taxpayer can use a de minimis amount of up to $2,500 per item for years beginning prior to January 1, 2016.
As a result of this Notice, you should review your accounting policies as of January 1, 2016 (or the beginning of your tax year starting after January 1, 2016) to ensure compliance with this new increased deduction level. Additionally, you should review to determine if you can use the increased deduction limit for 2015 or prior years.
If you have any questions, please contact your Marcum tax professional.
|A special thanks to article contributor Michael D'Addio, Principal, Tax & Business Services.|