On November 24, 2015, the IRS issued Notice 2015-82, which increases the deductible amount for purchases of de minimis tangible property from $500 to $2,500 per item. The new limit is for taxpayers who do not have an applicable financial statement (AFS), a financial statement that is required to be filed with the SEC or a certified audited financial statement accompanied by the report of an independent CPA.
When the IRS issued the final regulations on the deduction and capitalization of expenditures related to tangible property (the “repair regulations”) back in 2013, the Service provided an alternative to the general capitalization rules, which stated that taxpayers without an AFS could deduct $500 per item for their de minimis business expenses. Taxpayers with an AFS could deduct up to $5,000 per item.
The AICPA immediately responded to the IRS objecting that the $500 was far too low to help in reducing the burden of complying with the complex capitalization rules. The IRS received more than 150 comment letters also advocating for an increase in the $500 de minimis safe harbor limit for taxpayers without an AFS. Further, commenters felt this limit did not correspond to the financial accounting policies of many small businesses, which allow the deduction of amounts in excess of $500 as immaterial.
Beginning on January 1, 2016, the new de minimis amount is $2,500 per item for taxpayers without an AFS. For example, a taxpayer who purchases 100 computers for $2,400 apiece for a total of $240,000 could deduct this amount for tax purposes. This policy must be used for both financial accounting and tax purposes. A few things to keep in mind:
- The IRS will not raise the issues of a higher amount during an audit for earlier tax years and will not further pursue the issue for any tax year beginning after December 31, 2011 and ending before January 1, 2016 for any case pending an IRS examination, Appeals or the Tax Court.
- Taxpayers need to independently consider the impact on their financial statements as a result of the increase. For example, this impact this may have on debt covenants, EBITDA and other non-tax considerations
- Taxpayers need to determine if they should increase their capitalization standard to comply with this increased limit. They also will need to independently determine if this is an appropriate capitalization policy for GAAP purposes.
IMPORTANT ACTION STEP – Since this is a book accounting policy, every affected business will need to adopt a capitalization policy and have it in place before January 1 in order to apply it for 2016.
If you would like to discuss how these changes could affect your business, or would like to discuss any other tax matter with Machen McChesney, please contact Nick Wheeler, CPA at (334) 887-7022 or by leaving us a message below.
NOTE: This is provided as an example of a de minimis safe harbor expensing policy. This policy must be followed for a company’s books and records and, if applicable, for its audited financial statements if a company elects to follow the de minimis safe harbor. Companies must independently verify that this is a valid policy for financial accounting purposes.
DE MINIMIS EXPENSING POLICY
Adopted: November 24, 2015
The guidelines set forth in this policy are the company’s de minimis expensing policy, and is a necessary requirement for compliance with the Internal Revenue Code and tangible property regulations promulgated thereunder. The guidelines are intended to be used for the company’s non-tax and tax reporting.
[COMPANY NAME] will not capitalize amounts meeting the following criteria:
- Amounts paid to acquire, produce, or improve tangible property not exceeding $X,XXX are charged to the appropriate de minimis expense accounts. This threshold is applied at the per item or per invoice level and must include any allocable expenses on the invoice, e.g. taxes, transportation, etc., or
- Amounts paid to acquire, produce or improve tangible property with an economic useful life of 12 months or less are charged to the appropriate de minimis expense accounts.
This policy does not apply to land, inventory, or certain rotable, temporary, emergency spare parts.