KEY TAKEAWAY: Taxpayers without an Applicable Financial Statement are now granted a de minimis safe harbor expensing election of $2,500, up from $500.
Effective for tax years beginning on or after January 1, 2014, the IRS has issued significant final regulations relating to tangible assets, materials and supplies, and related repairs and maintenance items. As part of these Tangible Asset Regulations (“TARS”), a de minimis safe harbor was implemented to allow taxpayers to expense units of property that are below certain thresholds that would otherwise be subject to capitalization.
Under the de minimis safe harbor rules, a taxpayer with an Applicable Financial Statement (“AFS”) can elect to expense units of property up to $5,000 on a per item basis. An AFS is defined as follows:
i. A certified audited financial statement from an independent CPA;
ii. A financial statement required to be filed with the Securities and Exchange Commission; or
iii. A financial statement (other than a tax return) required to be provided to a federal or state agency or government.
In addition to the AFS requirement, the taxpayer is also required to have a written capitalization policy that is in place as of the beginning of the tax year. Taxpayers without an AFS were also provided a de minimis safe harbor, but at a much smaller cap of $500 per item. The IRS reasoned that the much larger AFS safe harbor limitation was warranted due to the independent assurance provided by an AFS that the taxpayer’s de minimis policies are consistent with the requirements of GAAP and do not materially distort the taxpayer’s financial statement income.
After the final TARS were issued, the IRS received numerous letters from representatives of small business taxpayers requesting that they increase the de minimis safe harbor limit for taxpayers that do not have an AFS. Commenters stated that the $500 threshold does not correspond to the financial accounting policies of many small businesses, which frequently permit the deduction of amounts in excess of $500 as immaterial. Many commenters also expressed concern regarding the disparate treatment of taxpayers with an AFS compared to those without an AFS under the safe harbor requirements, stating that obtaining an AFS is cost prohibitive for many small businesses and does not adequately justify the substantially lower de minimis ceiling for these taxpayers.
With Notice 2015-82, the IRS provides an increase in the de minimis safe harbor limit to $2,500 for taxpayers without an AFS.
The notice states the effective date for the change to be taxable years beginning on or after January 1, 2016. However, the IRS also states in the Notice that it will not raise the de minimis safe harbor issue upon an audit for taxable years beginning before January 1, 2016 if the taxpayer otherwise satisfies the necessary requirements.
So what does this mean for the 2015 tax year? As long as a taxpayer has implemented accounting procedures for book purposes that provide for a de minimis policy for purchases of tangible property and these procedures were in place and followed as of the beginning of the year, the taxpayer can use the increased expensing limitation.
Please contact John Rittichier, CPA, Mike Vogel, CPA or Kathy Ettensohn, CPA, MST, CIRM at 800-880-7800 should you have questions on how this Notice might affect you.
