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IRS Increases Tangible Property Expensing Threshold to $2,500

Nov 25th 2015
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Beginning in tax year 2016, the de minimis safe harbor limit for small business taxpayers who do not maintain an applicable financial statement will increase from $500 to $2,500, the IRS announced on Nov. 24.

The tangible property regulations, often referred to as “repair regulations,” were issued in early 2014 and provide a general framework for distinguishing capital expenditures from supplies, repairs, maintenance, and other deductible business expenses.

The new $2,500 threshold applies to amounts businesses spend to acquire, produce, or improve tangible property that would normally qualify as a capital item, according to Notice 2015-82. The threshold also applies to any such item substantiated by an invoice. As a result, small businesses will be able to immediately deduct many expenditures that would otherwise need to be spread over a period of years through annual depreciation deductions.

The IRS made the change after receiving more than 150 comment letters from small businesses and practitioners recommending that the threshold be raised. The suggested increased amount ranged from $750 to $100,000. Not only did the $500 de minimis amount not reduce the administrative burden on small businesses, but the cost of many commonly expensed items, such as tablets, smartphones, and machinery and equipment parts, often exceeded the threshold, commenters wrote.

In addition, practitioners noted the $500 threshold 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 American Institute of CPAs also urged the IRS to increase the threshold to $2,500 in an Oct. 8, 2014, letter to the tax agency.

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

The IRS reiterated that businesses can still claim otherwise deductible repair and maintenance costs, even if they exceed the $2,500 threshold. The agency also said it will provide audit protection to eligible businesses by not challenging use of the new $2,500 threshold in tax years prior to 2016.

For taxpayers with an applicable financial statement, the de minimis or small-dollar threshold remains $5,000.

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