We’re embarking here on what will at first seem something of a wonky tax item; nevertheless, it affects a great many small businesses and ultimately it’s not as daunting as it might initially appear.
Here is the eyes-glazing-over part, the Internal Revenue Service’s Nov. 24, 2015 notice concerning the following: “Increase in De Minimis Safe Harbor Limit for Taxpayers Without an Applicable Financial Statement.”
The good part is this: the IRS has raised to $2,500 (from the previous $500) the “safe harbor” tangible property deduction threshold (normally for capital items) for small businesses that aren’t required to produce audited financial statements.
As the IRS explains, “The new $2,500 threshold applies to any such item substantiated by an invoice. As a result, small businesses will be able to immediately deduct many expenditures that would otherwise need to be spread over a period of years through annual depreciation deductions.”
The low $500 threshold was putting a burden on small businesses, so along with the $2,500 threshold the IRS says it has also simplified record-keeping and paperwork.
The American Institute of CPAs has been pushing for such a change. In April 2015, the AICPA issued a news release in which it publicly asked the IRS to make the change: “The American Institute of CPAs (AICPA) recommended to the Internal Revenue Service (IRS) that the de minimis safe harbor threshold amount under the tangible property regulations for small business taxpayers without an applicable financial statement (AFS) be increased from $500 to $2,500.
“The AICPA believes the requirement that a taxpayer have an AFS to use the $5,000 de minimis threshold unfairly discriminates against smaller taxpayers, and recommends an alternative test to allow such taxpayers to use the de minimis rule,” Troy K. Lewis, CPA, CGMA, chair of the AICPA Tax Executive Committee, wrote in the April 21, 2015 letter. One caveat: to qualify, businesses using the threshold must have a policy to expense for book purposes. In other words, when purchased, the cost should be recorded as an expense and not as an asset.
The new threshold takes effect for tax year 2016, but the IRS won’t challenge use of the higher threshold for pre-2016 tax years, meaning businesses need not fear an audit for claiming the deduction. There is no change in the existing $5,000 de minimis threshold for taxpayers required to file an audited, or applicable, financial statement. This is a significant development for small businesses, and as the explanation shows, it’s not nearly so wonky as it first seems.
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