IRS Increases De Minimis Expensing Safe Harbor to $2,500
Author: Robert Conner
The IRS recently released Notice 2015-82, allowing taxpayers without an applicable financial statement (AFS) to deduct otherwise capital expenditures up to $2,500 per invoice (or item). This notice is in response to hundreds of commenters—including BKD—who sent letters to the IRS seeking an increase of the $500 safe harbor provided under the tangible property regulations also called the repair regulations.
The repair regulations took effect for tax years beginning on or after January 1, 2014, and are intended to reduce administrative burden by helping taxpayers distinguish a current deductible repair from a capital expense. One of the most talked-about provisions in these regulations is the de minimis safe harbor, which allows companies to claim a tax deduction for tangible property expenditures falling below their financial statement capitalization policy threshold.
This de minimis safe harbor threshold increase from $500 to $2,500 generally is effective for tax years beginning on or after January 1, 2016. However, the IRS will not challenge the pre-2016 application of the $2,500 de minimis threshold in situations where a taxpayer has an accounting policy in place as of the beginning of the applicable tax year that requires expensing of items costing no more than $2,500 for book purposes. The IRS made no change to the de minimis safe harbor threshold or mechanics for taxpayers with an AFS.
Capitalization Policy Requirement
To deduct otherwise capital expenditures under this de minimis safe harbor, a taxpayer must meet both of these requirements:
- Have an accounting policy in place as of the beginning of the applicable tax year that requires expensing of items costing no more than a specified dollar amount for book purposes
- Apply that policy for book purposes
If these requirements are satisfied, the otherwise capital acquisition cost of tangible property subject to the policy may be expensed for tax purposes. For taxpayers with an AFS, the policy limit can be as high as $5,000 per invoice or item and must be in writing as of the beginning of the tax year. For all other taxpayers, the amount increases from $500 or less to $2,500 or less per invoice or item; the policy is not required to be in writing, though a written policy is recommended for documentation purposes.
A company with a capitalization policy in excess of the allowable safe harbor threshold still may follow its book capitalization policy for tax purposes. However, in the event of an IRS examination, the company will have the burden of proving amounts deducted in excess of the safe harbor demonstrate a clear reflection of income.
Applicable Financial Statement Definition
As previously mentioned, the $5,000 de minimis safe harbor threshold is available for companies with an AFS. The regulations define an AFS as any of the following:
- A financial statement required to be filed with the Securities and Exchange Commission (SEC)
- A certified audited financial statement, accompanied by the report of an independent CPA, that is used for:
- Credit purposes
- Reporting to shareholders, partners or similar persons
- Any other substantial nontax purpose
- A financial statement (other than a tax return) required to be provided to the federal or state government or any federal or state agencies (other than the SEC or IRS)
Time-Sensitive Planning Opportunity
The increased de minimis safe harbor for non-AFS taxpayers offers businesses an opportunity to formalize their capitalization policy in a way that could allow additional costs to be deducted in the year they’re incurred. The availability of this safe harbor threshold hinges on whether companies without an AFS have a capitalization policy in effect as of the beginning of the year, e.g., January 1 for calendar-year companies. Prior to implementing any capitalization policy changes, companies should consult their tax advisor and external auditor (if applicable) to reconcile any competing tax and nontax considerations.
To learn more about how this increased de minimis safe harbor threshold may apply to your organization, including assistance with developing a capitalization policy, contact your BKD advisor.