On November 23, the IRS released Notice 2015-82, which increases the De Minimis Safe Harbor expense threshold from $500 to $2,500 for taxpayers without an Applicable Financial Statement. This change is effective for tax years beginning on or after January 1, 2016; however, audit protection is provided for prior tax years.
The Tangible Property Regulations, which were finalized in September 2013, established a De Minimis Safe Harbor to allow businesses to deduct expenses to acquire or produce a unit of property under a certain threshold. For businesses with an Applicable Financial Statement (AFS), the threshold was $5,000; for those without an AFS, the threshold was $500. An AFS is any one of three types of financial statements:
- An audited financial statement
- A financial statement required to be filed with the Securities and Exchange Commission
- A financial statement required to be filed with a federal or state government or government agency
Therefore, the higher $5,000 threshold was not available for taxpayers who merely received a review or compilation instead of an audit.
In response to the release of the $500 threshold amount, the IRS received numerous letters from small business representatives requesting that the IRS increase the threshold for taxpayers without an AFS to an amount greater than $500. The contention was that the $500 limitation was too low to effectively reduce the administrative burden of complying with the capitalization requirement for small business taxpayers that frequently purchase tangible property in their trades or businesses. Many commonly expensed items such as smart phones, tablet computers, and machine parts typically cost more than $500 and would therefore not qualify for the Safe Harbor.
In response to the feedback received from taxpayers and their advocates, the IRS released Notice 2015-82 on November 23, which increases the Safe Harbor threshold from $500 to $2,500 for taxpayers without an AFS. The $2,500 limit is effective for tax years beginning on or after January 1, 2016; however, audit protection is provided for tax years beginning prior to 2016. This means that the IRS will not raise upon examination the issue of whether a taxpayer without an AFS can utilize the Safe Harbor for items costing $2,500 or less, assuming the other Safe Harbor requirements are met.
So, for those taxpayers who used a limit of $1,000 during the 2015 tax year, for example, the IRS will not raise the issue upon examination that this amount is greater than the $500 threshold. In essence, this gives de facto Safe Harbor protection to taxpayers for the 2015 tax year who have capitalization policies of $2,500 or less and properly elect the Safe Harbor.
Moving forward, taxpayers without an AFS can utilize the $2,500 threshold amount and expense costs falling under that threshold assuming they have met the other requirements of the Safe Harbor. This is a dramatic increase that should significantly reduce the administrative burden for many taxpayers, especially larger taxpayers who only get a review or compilation.
Electing the Safe Harbor
It is important to keep in mind that the Safe Harbor is an annual election that is made on the federal tax return and requires book-tax conformity for items falling under the threshold amount. In addition, taxpayers must have accounting procedures in place at the beginning of the tax year stating that they will be treating as an expense for book purposes amounts paid for property costing less than the threshold amount.
Act before January 1st
Given the requirement to have accounting procedures in place at the beginning of the tax year, now is a good time to draft those procedures, applying the updated threshold amount, to ensure the Safe Harbor is available for your 2016 tax year.
If you have any questions on the accounting procedures, the De Minimis Safe Harbor, or this IRS Notice, please contact your CSH advisor.