You may remember the fiasco at the beginning of 2015 with the implementation of the new capitalization regulations and how we received revised procedures every 2-3 weeks. Well, after receiving many public comments, the Internal Revenue Service has made another change: to raise the de minimis safe harbor threshold, for taxpayers without audited financial statements, from $500 per item to $2,500 per item. (IRS Notice 2015-82, 11/24/2015)
This is good news for businesses, especially since Congress has not yet acted either to reinstate bonus depreciation or to increase the Sec. 179 deduction limit beyond $25,000 for the 2015 tax year or beyond. So, if management chooses to establish an accounting policy of expensing all items of tangible property purchased under a set dollar amount, then those items (up to $2,500 each) can be expensed as ordinary and necessary business expenses on the tax return as well.
While the notice is effective for purchases made after January 1, 2016; it also provides audit protection for those companies who had a higher than $500 minimum policy in place for book purposes, but was limited to $500 for tax purposes. In other words, if the company had a written policy of expensing all items under $1,000 for books purposes at the beginning of 2015, then all items under $1,000 could be expensed, under the new rule, on the 2015 tax return even though the effective date of the notice is January 1, 2016.
Since this change will allow more purchases to be expensed in the current year, rather than capitalized (depreciated) over time, management of businesses without audited financial statements should review their policy and make a decision as to what their minimum threshold should be, put it in writing, and communicate it to those recording transactions on the company’s books as well as the tax preparer.
Contact us to find out how this may affect you and your business! Also, we have a bank election form ready for your use here!