The IRS recently increased the de minimis safe harbor expensing threshold for taxpayers without an applicable financial statement from $500 to $2,500 per invoice or item. The increased threshold is generally effective for tax years beginning on or after January 1, 2016.
De Minimis Safe Harbor
The de minimis safe harbor, a key component of the final tangible property regulations, permits taxpayers to follow their financial statement capitalization expensing procedures up to the allowable safe harbor threshold if certain requirements are met. The allowable threshold depends on whether the taxpayer has an applicable financial statement (AFS).
A taxpayer has an AFS if its financial statement is either:
- Filed with the SEC
- Audited by an independent CPA and used for credit purposes, reporting to shareholders, or another nontax purpose—a review or a compilation by a CPA firm doesn’t qualify
- Required to be provided to a federal or state government or agency
For taxpayers without an AFS, here are the de minimis safe harbor requirements:
- As of the first day of the tax year, the taxpayer has accounting procedures in place that expense amounts paid for items costing less than a specified dollar amount or amounts paid for items with an economic useful life of less than 12 months.
- The taxpayer expenses the amount paid for an item on its financial statements in accordance with its accounting procedures.
- The amount paid for the property doesn’t exceed the allowable threshold per invoice or per item as substantiated by the invoice.
- For years beginning on or after January 1, 2014, but before January 1, 2016, the allowable threshold is $500.
- For years beginning on or after January 1, 2016, the allowable threshold is $2,500.
- The taxpayer includes the appropriate de minimis safe harbor election statement with its timely filed original tax return.
For taxpayers with an AFS, the allowable threshold is $5,000 per invoice or item and its accounting procedures are required to be documented in writing as of the first day of the tax year.
If a taxpayer has a capitalization policy in excess of its allowable threshold, it may still follow its financial statement capitalization policy as long as the increased amount clearly reflects income. However, this is subjective, and any expensing in excess of the allowable safe harbor amount is subject to challenge in an IRS examination.
The new guidance provides that if a taxpayer without an AFS has been using a capitalization threshold in excess of $500 but less than $2,500 for years prior to 2016, the IRS won’t challenge the taxpayer’s deductions under its policy as long as all the other requirements of the de minimis safe harbor were met.
Action Required Before Year-End
Taxpayers without an AFS should evaluate their book capitalization policy in light of the increased allowable amount under the de minimis safe harbor. If their capitalization policy applies to amounts less than $2,500, they may want to increase their expensing policy threshold to increase their allowable tax deductions and reduce their overall tax liability.
For calendar-year taxpayers, any change would need to be implemented as of January 1, 2016, to be effective for the 2016 tax year. Consult with your tax advisor and, if applicable, your external auditor to assess whether such a change to your capitalization policy is appropriate before implementing it.
We're Here to Help
Moss Adams can help you review your current capitalization policy to determine if you can benefit from this new guidance. Contact your Moss Adams tax professional for more information.