On November 24, 2015, the IRS gave small businesses something to be thankful for that had nothing to do with turkey or cranberries. In a notice, the agency announced that it was raising the so-called “safe harbor” threshold for deducting certain capital items, currently set at $500, to $2,500.
The “de minimis safe harbor election” applies to taxpayers that do not maintain an applicable financial statement (AFS). According to the IRS, this change will simplify the paperwork and recordkeeping requirements for small business and other taxpayers.
The safe harbor threshold was introduced in 2013 as part of the IRS’ revised tangible property repair regulations. Under Section 263 of the tax code, the regulations allow qualifying small businesses to choose to deduct the cost of a unit of property instead of capitalizing it and depreciating it over time.
A “unit of property” includes leasehold improvements, computers, business machines, phone systems, other equipment, furniture and fixtures—just about any kind of tangible property that your company purchases or finances and would need to capitalize and that can be substantiated by an invoice.
The increased threshold is effective for tax years beginning on or after January 1, 2016.
Why the increase?
The IRS said that the increase was a response to a “call for comments” put out in February, that resulted in “more than 150 letters from businesses and their representatives suggesting an increase in the threshold, noting that the existing threshold was too low to effectively reduce administrative burden on small business.”
Commenters also remarked that many commonly expensed items such as tablet-style personal computers, smart phones and equipment parts for repairs “typically surpassed the $500 threshold.”
In a statement to the press, IRS Commissioner John Koskinen said, “This important step simplifies taxes for small businesses, easing the recordkeeping and paperwork burden on small business owners and their tax preparers.”
What does it mean for my business?
Thanks to the increased threshold, small businesses will now be able to deduct many expenses right away, that otherwise would have to be capitalized, and spread over a long period of time via yearly depreciation deductions.
The American Institute of Certified Public Accountants (AICPA) is in favor of the increase, and in October of 2014, sent a letter to the IRS in support of raising the threshold to $2500.
The increased threshold should save you time and money.
What do I need to do?
Taxpayers that want to take advantage of the higher threshold must make sure that they meet all the requirements to use the safe harbor before the first day of their 2016 tax year—and that they actually record the $2,500 expenditures as expenses and not as fixed assets on their books and records.
Beyond that, taxpayers need to understand that the new rules and regulations pertaining to tangible property can be very complex.
Working with a CPA who fully realizes all of the tax-planning opportunities, and potential pitfalls regarding the tangible property regulations, can be crucial to your business’s success under the new regulations.
Steven Blumenthal, CPA is the Principal of MBAF CPA’s LLC, located on 440 Park Avenue South, New York, NY 10016. He can be reached by telephone at (212) 931-9254 or email at email@example.com.