Typically, businesses must capitalize any amount paid to acquire or produce property. However, under the new Tangible Property Regulations that became effective for the 2014 tax year, small businesses were eligible to make an annual safe harbor election to expense de minimis amounts. In tax years 2014 and 2015, that amount was limited to $500 for those businesses that did not have an audited financial statement or other Applicable Financial Statement (AFS).
Realistically, this amount was not reasonable to cover common expenses, such as a tablet, cell phone or many tools. Based on feedback from the tax professional community, the IRS has issued Notice 2015-82. This new guidance increases the de minimis safe harbor amount for taxpayers without an AFS to $2,500 for tax years beginning after 2015. The IRS has also stated that they will not challenge taxpayers who have used a capitalization policy higher than the previous $500 threshold in earlier years if the other requirements of the applicable regulation were met.
For businesses with formal written capitalization policies, it is recommended that they update their capitalization threshold to reflect the new safe harbor amount or include a phrase similar to the following: “with a per item cost of $2,500 or less (or other amount as identified in published IRS policy)”. The business should then include updated IRS guidance with their policy, as necessary, to avoid a constant requirement to revise policies for a change in the IRS approved de minimis value. For taxpayers without an AFS, there is no requirement that their capitalization policy be written in order to take advantage of the de minimis safe harbor.
The De Minimis Safe Harbor election is an annual election, and must be included with each year’s tax return. Furthermore, the capitalization threshold must be consistently applied for both tax and financial accounting purposes.
If you have questions regarding the new De Minimis Safe Harbor or other areas of the Tangible Property Regulations, please contact us at 703.385.8888 or firstname.lastname@example.org.