In September 2013, the IRS released 200 pages of guidance to business owners on when they should immediately deduct repair expenses or depreciate the repair expenses over several years. This guidance also addressed when business owners can immediately deduct asset purchases or when they should capitalize the asset purchase and deduct it over a number of years through depreciation.
Fortunately, the IRS has a de minimis safe harbor election that allows business owners to immediately deduct amounts paid for property if the business owner meets certain requirements.
This safe harbor was intended as an administrative convenience whereby a business owner can deduct small dollar expenditures for the purchase of new property or for the improvement of existing property. If the business owner spends an amount greater than the safe harbor amount, the safe harbor does not bar the business owner from immediately deducting the expense, but the business owner must establish that the expense qualifies as an item that can be expensed immediately.
How to Meet the Safe Harbor
To meet the safe harbor, the taxpayer:
• must have, at the beginning of the tax year, written accounting procedures treating as an expense for non-tax purposes amounts paid for property (1) costing less than $2,500 (per invoice or per item); or (2) with an economic useful life of 12 months or less
• treats the amount in its books and records as an expense
The original threshold limit was $500 per item or invoice. The IRS received a substantial number of comments noting that the cost of many commonly expensed items (for example, tablet-style computers, smart phones, and machinery and equipment parts) typically exceed the prior $500 per item or invoice threshold.
Example: ABC Corp has accounting procedures at the beginning of the year to expense amounts paid for property costing $2,500 or less and to expense amounts paid for property with an economic useful life of 12 months or less.
During the year, ABC buys 10 hand-held point-of-service devices at $600 each (total cost $6,000). Prior to the increase in the safe harbor threshold amount, ABC would have to capitalize the $6,000 purchase price and depreciate the expense over 5 years because each item cost more than the prior $500 safe harbor threshold.
Since the threshold has just been increased to $2,500 per item or invoice, ABC can now fully deduct the $6,000 purchase price of the items because the expense was less than $2,500 per item.
When Does the Safe Harbor Take Effect?
This increase is effective for costs incurred during tax years beginning 2016, but use of the new threshold won’t be challenged in tax years prior to 2016. And, if a taxpayer’s use of the de minimis safe harbor is an issue under consideration in examination, appeals, or before the U.S. Tax Court in a tax year beginning after Dec. 31, 2011 and ending before Jan. 1, 2016, and the issue relates to the qualification under the safe harbor of an amount that doesn’t exceed $2,500 per invoice (or item, as substantiated by invoice) and the taxpayer otherwise satisfies the applicable requirements, IRS won’t pursue the issue further.
To see how this applies to you, give us a call at 248-538-5331.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.