IRS Increases Tangible Property Expensing Threshold for Small Businesses

Good news for small businesses: On November 24, 2015, the IRS announced an increase in the safe harbor threshold for deducting certain capital items, raising it from $500 to $2,500, for qualified small businesses. The $2,500 threshold will take effect for taxable years beginning on or after January 1, 2016. Additionally, the IRS announced that they will provide audit protection to eligible businesses by not challenging use of the new $2,500 threshold in tax years prior to 2016.

This update affects qualified small businesses that do not have applicable financial statements, such as a certified audit financial statement. The new threshold can be applied to expenses that are incurred to acquire, produce or improve tangible property that would typically qualify as a capital item. It also applies to items that can be substantiated with an invoice, thereby allowing small businesses to immediately deduct expenses that would normally need to be spread over a period of years through annual depreciation deductions.

The IRS increased the threshold in an effort to simplify the filing and record keeping requirements for small businesses. The increase was also in response to over 150 comments from taxpayers and practitioners stating that the previous safe harbor of $500 did little to reduce the burden of the additional filing requirements. A number of the comments noted that many of the commonly expensed items, such as tablets, smartphones, and machinery and equipment parts exceeded the previous threshold of $500.

IRS Commissioner John Koskinen stated, “This important step simplifies taxes for small businesses, easing the recordkeeping and paperwork burden on small business owners and their tax preparers.”

It is important to note that for those businesses that do have applicable financial statements, the threshold remains at $5,000. In addition, taxpayers must have a policy in place regarding the expensing of de minimis purchases, which must be followed for both book and tax purposes. The policy must be in place and implemented as of the first of the taxable year.

The Tangible Property Regulations remain a complex and an ever-changing area of tax law. Should you have any questions about these regulations, please feel free to contact me at (805) 963-7811 or bforeman@bpw.com.