The IRS has increased the maximum threshold for expensing certain capital items under the De Minimis Safe Harbor from $500 to $2,500. The threshold for taxpayers with an applicable financial statement (AFS) remains set at a maximum of $5,000 per invoice (or per item as substantiated by the invoice).

The increase is in response to practitioner comments that the $500 limitation was too low to effectively reduce the administrative burden of capitalizing the cost of many commonly purchased items such as computers, smart phones, machinery and equipment parts. The $500 threshold also did not correspond to the financial accounting policies of many small businesses, which frequently permit the deduction of amounts in excess of $500 as immaterial.

The increased threshold is effective for tax years beginning on or after January 1, 2016.

For a tax year beginning before January 1, 2016, the IRS will not raise the issue of whether a taxpayer without an AFS can utilize the De Minimis Safe Harbor for an amount that does not exceed the new $2,500 limit if the taxpayer otherwise satisfies the requirements for using the safe harbor. Furthermore, if the taxpayer’s uses a threshold greater than the $500 threshold, but not higher than the new $2,500 threshold for a tax year beginning after December 31, 2011 and ending before January 1, 2016, the IRS will not focus on this issue in an examination, appeals or tax court if the taxpayer satisfied all other applicable requirements for using the safe harbor.

Since the safe harbor is not an accounting method, it is not necessary to file an accounting method change to use the increased threshold amount. However, in accordance with the existing rules, the taxpayer must have accounting procedures in place at the beginning of the tax year that expense for non-tax purpose amounts paid for property costing less than a specified dollar amount (not to exceed the applicable threshold). The taxpayer must also expense those amounts on its books and records. In the case of a taxpayer without an AFS, the written accounting procedures do not need to be in writing.

Have questions about how the new De Minimis Safe Harbor expensing thresholds impact your business or how to implement them, contact our tax advisors today.