De Minimis Safe Harbor Changes
Good news from the IRS for companies taking advantage of safe harbor election under the new tangible property rules.
In an announcement made recently, they have raised the de minimis safe harbor amount from $500 to $2,500 for companies that don’t maintain an audited financial statement. This means that smaller companies with qualifying activities can now receive a higher benefit effective for the tax year 2016. Remember a safe harbor election allows a company to immediately deduct the full amount of tangible property purchases below certain dollar thresholds instead of capitalizing them for tax purposes. The de minimis – or “small dollar” – safe harbor can provide a better tax benefit versus spreading a depreciation deduction out over a period of several years. To help clients, prospects and other understand this change and it’s benefits, Hanson & Co. has provided a brief summary below.
The new $2,500 threshold takes effect starting with the 2016 tax year. However, the IRS also announced that it would not challenge use of the new $2,500 threshold in tax years prior to 2016 if the taxpayer otherwise satisfies the de minimis safe harbor requirements. One of those requirements is to have the accounting policy to expense amounts below a certain threshold in place at the beginning of the tax year. For this reason, taxpayers without an AFS will generally still be limited to the $500 threshold for 2015 unless their pre-existing capitalization policies already exceeded that amount.
The de minimis safe harbor applies to amounts spent to acquire, produce, or improve tangible property that would normally qualify as a capitalized item. The new $2,500 per-item threshold will cover the cost of many more common business expenditures, such as personal computers, tablets, smart phones, high-end office furniture, machinery, and equipment parts that typically surpass the $500 threshold and had to previously be depreciated as a capitalized expense.
There are a number of steps to follow in order to take advantage of the new changes, keep the following in mind:
- The de minimis threshold is applied per invoice or per item. If you plan to purchase multiple pieces of the same equipment at one time (for instance, computers, phones, tablets, office chairs, etc.), ensure that your accounting staff is applying the de minimis threshold on a per item basis to maximize your current deductions.
- If you are subject to uniform capitalization rules for the production or acquisition of inventory, you may still be required to capitalize the cost of tangible property if it is produced or acquired for resale (direct or allocable), even if the amount falls below the de minimis threshold.
- Be sure to document your accounting capitalization policy or any changes to it prior to January 1, 2016, (even though a written policy is not required for taxpayers without an AFS) because the amount that can be deducted under the de minimis safe harbor is limited to the lesser of the current threshold or the specifics relayed in your accounting policy.
The recently announced changes will provide many companies with an immediate tax savings. However, to ensure compliance with the complex record keeping and compliance regulations, it’s essential to work with a qualified advisor to guide you through the process. If you have questions, Hanson & Co. is here to help! For additional information contact us at (303) 388-1010, or click here for email. We look forward to speaking with you soon.