United States

IRS increases the de minimis safe harbor for nonaudited taxpayers

TAX ALERT  | 

On Nov. 24, 2015, the IRS released an early Thanksgiving gift to taxpayers by increasing the de minimis safe harbor limit for taxpayers that do not have an applicable financial statement (AFS) (defined below). In Notice 2015-82, the IRS increases the de minimis safe harbor limit in Reg. section 1.263(a)-1(f)(1)(ii)(D) (for taxpayers without an AFS) from $500 to $2,500, effective for taxable years beginning on or after Jan. 1, 2016.

The de minimis safe harbor permits taxpayers to not capitalize certain amounts paid for tangible property that it acquires or produces during the taxable year. In order for an expenditure to qualify for the de minimis safe harbor, the taxpayer must treat the expenditure as an expense on its books and records (financial statements) and the taxpayer has accounting procedures treating as an expense for non-tax purposes at the beginning of the taxable year for property costing less than a specified dollar amount. Provided a taxpayer meets those requirements, the expenditure generally can be deducted in the year paid or incurred.

The regulations provide for a $5,000 de minimis safe harbor limit for taxpayers that have an AFS, while previously providing for a $500 limit for those without an AFS. An AFS is defined in Reg. section 1.263(a)-1(f)(4) as the following:

  1. A financial statement required to be filed with the Securities and Exchange Commission (SEC) (the 10-K or the Annual Statement to Shareholders)
  2. A certified audited financial statement that is accompanied by the report of an independent certified public accountant (or in the case of a foreign entity, by the report of a similarly qualified independent professional) that is used for –
    a. Credit purposes
    b. Reporting to shareholders, partners or similar persons
    c. Any other substantial non-tax purposes; or
  3. A financial statement (other than a tax return) required to be provided to a federal or a state government or any other federal or state agency (other than the SEC or the Internal Revenue Service)

The IRS received many comments from taxpayers without an AFS that felt the de minimis limit was too low. In January 2015, the IRS released Rev. Proc. 2015-20, which, among other things, formally requested comments on the appropriateness of increasing the de minimis safe harbor limit for a taxpayer without an AFS to an amount greater than $500.

The IRS’ call for comments was clearly heard as it received over 150 comments with a general theme that $500 was too low of an amount to effectively reduce the administrative burden of compliance with the capitalization requirements that was intended with the issuance of the final tangible property regulations. In response to the comments, the IRS increased the safe harbor limit for taxpayers without an AFS.

This guidance is certainly welcomed by taxpayers that do not have an AFS. The increase in the de minimis limits allows for common business expenditures, such as tablets, laptops, smart phones and other machinery and equipment parts to be expensed under the new de minimis safe harbor limit of $2,500. However, as the increase in the de minimis safe harbor limit is effective for taxable years beginning on or after Jan. 1, 2016, and taxpayers must have accounting policies in place that define expensing amounts for property costing less than a specified dollar amount or amounts paid for property with an estimated economic useful life of less than 12 months at the beginning of the taxable year, taxpayers have limited time to review their existing capitalization policies to determine the most appropriate policy for their trade or business. Taxpayers should consult with their tax advisors prior to year-end to best make this determination.


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