The IRS has increased from $500 to $2,500 the maximum threshold for expensing certain capital items under the de minimis safe harbor effective for tax years beginning on or after January 1, 2016. The threshold for taxpayers with an applicable financial statement (AFS) remains set at a maximum of $5,000 per invoice (or per item as substantiated by the invoice).
The increase is in response to practitioner comments that the $500 limitation was too low to effectively reduce the administrative burden of capitalizing the cost of many commonly purchased items such as computers, smart phones, machinery and equipment parts. The $500 threshold also did not correspond to the financial accounting policies of many small businesses, which frequently permit the deduction of amounts in excess of $500 as immaterial. Furthermore, commentators expressed concern regarding limitation due to the fact that the previous safe harbor amount could only be substantiated if the taxpayer can establish that its “policy results in a clear reflection of income,” creating an additional burden and uncertainty for taxpayers.
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 the $500 threshold (but not higher than the new $2,500 threshold) is an issue under consideration in examination, appeals, or before the Tax Court in a tax year that begins after December 31, 2011, but ends before January 1, 2016, the IRS will not prosecute the issue as long as the taxpayer has satisfied all other safe harbor requirements.