The IRS has increased the de minimis safe harbor limit for expensing tangible property that is expensed for book purposes from $500 to $2,500 for taxpayers without an applicable financial statement (AFS).
The final tangible property regulations (TD 9636
and TD 9689
) include several simplifying elections intended to increase taxpayer compliance and reduce the administrative burden. (For more on the final tangible property regulations, see Tax Flash 2013-13 and Tax Flash 2014-10). One such election is a de minimis safe harbor election that permits a taxpayer to expense tangible property expensed for book purposes, provided the taxpayer meets certain requirements and the property does not exceed certain dollar limitations. Under Treas. Reg. Sec. 1.263(a)-1(f)(1)(ii)(D), the safe harbor for taxpayers without an AFS is limited to amounts paid for the property that do not exceed $500 per invoice (or per item as substantiated by the invoice).
New de minimis threshold
Notice 2015-82, issued on Nov. 24, increases the de minimis safe harbor limit provided in Treas. Reg. Sec. 1.263(a)-1(f)(1)(ii)(D) for a taxpayer without an AFS from $500 to $2,500. The limit for taxpayers with an AFS remains $5,000.
The notice is effective for costs incurred during taxable years beginning on or after January 1, 2016. However, for taxable years beginning before Jan. 1, 2016, the notice states the IRS will not bring up in examination the issue of whether taxpayers without an AFS may use the new threshold amount, provided they meet all other requirements.
Implications and next steps
This guidance was the result of Treasury and the IRS receiving more than 150 comment letters in which commenters wrote that the $500 limitation was too low to effectively reduce the administrative burden of complying with the capitalization requirements. This is welcome guidance that will significantly reduce the burden for many taxpayers.
Taxpayers should make sure that they meet all the requirements to apply the de minimis safe harbor prior to the first day of their 2016 tax year. Taxpayers who already meet all of the requirements in earlier years will still need to rely on the clear reflection of income standard for amounts over $500, although the notice states the IRS will not challenge amounts up to the new $2,500 threshold.
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