Dec. 23, 2015 – The Internal Revenue Service (IRS) recently raised the threshold for deducting de minimis capital expenditures, from $500 to $2,500. But solo and small firms that want to take advantage of this in 2016 may need to take action before the end of this year.
According to the IRS, “the change affects businesses that do not maintain an applicable financial statement (audited financial statement),” and “applies to amounts spent to acquire, produce, or improve tangible property that would normally qualify as a capital item.” The IRS says the change will simplify the paperwork and recordkeeping requirements for small businesses.
This new rule helps small businesses “immediately deduct many expenditures that would otherwise need to be spread over a period of years through annual depreciation deductions.” Thus, a solo or small firm (or other small business without financial statements) that makes a business purchase of $2,500 or less can take an immediate deduction, rather than depreciate the item over time.
Requirements to Qualify
Tax attorneys Thomas J. Nichols and James W. DeCleene, of Meissner Tierney Fisher & Nichols S.C. in Milwaukee, published an alert on this topic yesterday.
They noted that in order to qualify, “a taxpayer must have accounting procedures in place ‘at the beginning of the taxable year’ that treat amounts below a specified dollar amount and/or items with an economic useful life of 12 months or less as an expense for non-tax purposes.” See 26 CFR §§ 1.263(a)-1(f) (De minimis safe harbor election).
The accounting procedure need not be in writing. But according to the IRS, “you must expense amounts on your books and records for the taxable year in accordance with a consistent accounting procedure or policy existing at the beginning of the taxable year.”
According to Nichols and DeCleene: “it looks like the only thing that would need to be done now in order for this increased limit to apply for 2016 calendar taxable years is the adoption of the appropriate accounting procedure on or before January 1, 2016.
“This could be as simple as including a piece of paper, email or other notation in a company's accounting records with the following language: ‘All amounts paid for property costing less than $2,500 or having an economic useful life of 12 months or less shall be treated as an expense, and not as a capital expenditure.’ Maybe printing this notice out and placing it with your accounting records would do the trick.”
Make a De Minimis Safe Harbor Election
If your accounting policy is in place to start the taxable year, the IRS says “you may properly deduct these amounts for federal tax purposes, as long as you can show that your reporting policy clearly reflects your income.” Do this by making the de minimis safe harbor election “to assure that the items costing [$2,500] or less will not be questioned.”
To take the election, the IRS says you should attach a statement titled “Section 1.263(a)-1(f) de minimis safe harbor election” to your timely filed original federal tax return (including extensions) for the taxable year in which de minimus amounts are paid.
Include your name, address, and Taxpayer Identification Number, as well as a statement that you are making the de minimis safe harbor election, the IRS says.
New IRS Expensing Rules May Require Action by Year-End, Thomas J. Nichols & James W. DeCleene, Meissner Tierney Fisher & Nichols S.C. (Dec. 22, 2015).
For Small Businesses: IRS Raises Tangible Property Expensing Threshold to $2,500; Simplifies Filing and Recordkeeping, IRS, IR-2015-133 (Nov. 24, 2015).
Tangible Property Regulations: Frequently Asked Questions, IRS (last updated Dec. 4, 2015).
Year-End Tax Planning Strategies for Solo and Small Firm Practitioners, WisBar InsideTrack (Dec. 2, 2015).