This fall, the IRS increased the de minimis safe harbor threshold for expensing asset purchases from $500 to $2,500 for taxpayers without an applicable financial statement (AFS). The threshold for taxpayers with an AFS remains set at a maximum of $5,000 per invoice (or per item as substantiated by the invoice). An AFS is typically a set of audited financial statements.
The IRS has increased this threshold due to an overwhelming number of comments from practitioners and taxpayers claiming that the $500 amount was too low considering the increasing cost of common business purchases. Smartphones, computers, and equipment parts routinely cost more than $500. It creates an unnecessary record-keeping burden to capitalize such small and ordinary purchases.
The de minimis safe harbor is an annual election that a taxpayer can take on their return. There is no need to file an accounting method change. This election must be made every year in which the protection is desired. A safe harbor provides protection from audit scrutiny. It is essentially a “free pass,” in which the IRS will not question your decision to expense purchases below this threshold.
For a tax year beginning before January 1, 2016, the IRS will not raise the issue of whether a taxpayer without an AFS can utilize the de minimis safe harbor for an amount that does not exceed the new $2,500 limit if the taxpayer otherwise satisfies the requirements for using the safe harbor. Furthermore, if the taxpayer’s use of a threshold greater than $500 but not higher than $2,500 is an issue under consideration for examination, appeals, or before the Tax Court in a tax year that begins after December 31, 2011, and ends before January 1, 2016, the IRS will not pursue the issue as long as the taxpayer satisfied all other applicable requirements for using the safe harbor.
It should be noted that a best practice when implementing the de minimis safe harbor is to keep a clearly defined capitalization policy on file. The Company must adhere to their policy. The IRS is hoping to increase conformity of book and tax income, especially for smaller taxpayers.
For more information or to work through a detailed plan with Melanson Heath, please contact us at 1-800-282-2440. We can also provide you with a sample de minimis safe harbor capitalization policy for your business.