IRS increases de minimis safe harbor

Dec 22, 2015

On November 24, 2015, the IRS issued notice 2015-82, increasing from $ 500 to $ 2,500 the amount which can be expensed for tangible property for taxpayers without audited financial statement – de minimis safe harbor. According to regulations, a taxpayer can deduct/expense the cost of the tangible personal property, if they meet certain requirements of the project.

This notice is effective for fiscal years beginning on or after January 1, 2016, the IRS did not make it retroactive, as such, the taxpayer can not take advantage of the annual $ 2,500 limit for tax years which began prior to January 2016.

The limit for taxpayers with audited financial statements remains at $ 5,000.

Observation:  This relief may not be helpful if a taxpayer had tailored its procedures to the old $500 limit.  While the old rule did not require using $500 as the maximum limit on the procedures, rather just granting no automatic protection on exam to any items in excess of that amount, some taxpayers nevertheless adopted policies that tied directly to the $500 limit.  If a taxpayer has such a policy in place currently the taxpayer will not be able to take advantage of the higher limit until it first changes its policy and second begins a new tax year.

What is the de minimis safe harbor election?

Under the final tangibles regulations, you may elect to apply a de minimis safe harbor to amounts paid to acquire or produce tangible property to the extent such amounts are deducted by you for financial accounting purposes or in keeping your books and records. If you have an applicable financial statement (AFS), you may use this safe harbor to deduct amounts paid for tangible property up to $5,000 per invoice or item (as substantiated by invoice). If you don’t have an AFS, you may use the safe harbor to deduct amounts up to $2,500 ($500 prior to 1-1-2016) per invoice or item (as substantiated by invoice).

These limitations are for purposes of determining whether particular expenses qualify under the safe harbor; they aren’t intended as a ceiling on the amount you can deduct as business expenses under the IRC.

The de minimis safe harbor election does not include amounts paid for inventory and land. Additionally, it does not apply to rotable, temporary, and standby emergency spare parts that the taxpayer elects to capitalize and depreciate under § 1.162-3(d). It does not apply to rotable and temporary spare parts that the taxpayer accounts for under the optional method of accounting under § 1.162-3(e).

Neither the IRC nor prior regulations included a de minimis safe harbor exception to capitalization; you were required to determine whether each expenditure for tangible property, regardless of amount, was required to be capitalized. The de minimis safe harbor election eliminates the burden of determining whether every small-dollar expenditure for the acquisition or production of property is properly deductible or capitalizable. If you elect to use the de minimis safe harbor, you don’t have to capitalize the cost of qualifying de minimis acquisitions or improvements. However, de minimis amounts you pay for tangible property may be subject to capitalization under §263A, if the amounts include the direct or allocable indirect costs of other property you produced or acquired for resale. For example, you must capitalize all the direct and allocable indirect costs of constructing a new building.

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