In 2013, Treasury and the IRS issued regulations to provide guidance for required capitalization of certain assets, applicable for tax years beginning in 2014. The IRS recently released a notice, changing the capitalization threshold for taxpayers without an applicable financial statement. For tax years beginning on or after January 1, 2016, the IRS has released Notice 2015-82 allowing businesses without an applicable financial statement to expense fixed assets costing $2,500 or less. This limit is $2,000 higher than the previous limit of $500 in the Regulations.
The de minimis safe harbor election allows taxpayers to expense, instead of capitalize and depreciate, certain fixed assets if they have a useful lives of less than one year or cost less than a certain dollar amount. This dollar amount varies based on the type of financial reporting in which a business engages.
To determine which dollar amount applies to a given business, the business must determine whether it issues a so-called applicable financial statement (AFS). The statements that would be considered an AFS are the following:
- A financial statement required by the SEC.
- A certified audited financial statement alongside a CPA’s report used for credit purposes, reporting to owners, or any other substantial non-tax purpose.
- A statement required to be supplied to a federal or state government other than the SEC or IRS.
If a business produces and submits any of the above statements, it may expense any fixed assets or improvements thereto that cost $5,000 or less. This amount does not change with the new Notice. However, if the business does not produce any of the above, it may now expense assets worth up to $2,500. Before the new regulations, this amount was limited to only $500.
It is also important to note that limit is on a per asset basis. This means that if a business purchases ten assets costing $2,000 each, it can expense all ten assets immediately, despite the fact that the total cost of the assets ($20,000) well exceeds both safe harbor limits. There is currently no limit on the total dollar value of de minimis deductions.
The only other notable caveat is that a business must expense the same assets for tax purposes as it does on its financial books and any AFS it issues. This is why some refer to this rule as the “book-tax conformity election.”
So, starting in 2016, a business without an AFS may now expense certain tangible assets under $2,500. The de minimis safe harbor does not impact the §179 deduction, so taxpayers may consider using these two expensing opportunities to minimize tax liability.
The Notice states that for years beginning before 2016, the IRS will not raise upon examination the issue of whether a taxpayer without an AFS can utilize the $2,500 de minimis, so effectively the new de minimis may be utilized in 2015, as well.
For the text of the Notice, click here Notice 2015-82
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