On Nov. 24, 2015, the IRS issued Notice 2015-82, which increases the de minimis expense limit from $500 to $2,500 for taxpayers that do not have an applicable financial statement (AFS). An AFS is a financial statement required to be filed with the Securities and Exchange Commission or a certified audited financial statement that is accompanied by the report of an independent certified public accountant. This change will simplify the paperwork and recordkeeping requirements for taxpayers.
On Sept. 17, 2013, the IRS issued the final tangible property regulations which are detailed here. As an alternative to the general capitalization rules, these regulations provided that taxpayers without an AFS could deduct up to $500 per item for their de minimis business expenses provided the company has a documented capitalization policy in place.
For example, a taxpayer who bought 100 tablet computers for $450 each, a total of $45,000 paid, could deduct this for tax purposes under the de minimis safe harbor since each individual item was less than $500. The policy must be used for both financial accounting and tax purposes.
The IRS received more than 150 comment letters suggesting an increase in the $500 de minimis safe harbor limit for taxpayers without an AFS. The commenters wrote the limit was too low to reduce the administrative burden of complying with the capitalization requirement. In addition, commenters stated the $500 threshold does not correspond to the financial accounting policies of many small businesses, which frequently permit the deduction of amounts in excess of $500 as immaterial.
For costs incurred during taxable years beginning on or after Jan. 1, 2016, the de minimis limit is increased to $2,500 per item for taxpayers without an AFS. For example, a taxpayer without an AFS that purchases 100 computers for $2,400 each, a total of $240,000 paid, could deduct this for tax purposes under the increased de minimis safe harbor since each individual item was less than $2,500. Again, this policy must be used for both financial accounting and tax purposes.
Taxpayers need to independently consider the impact on their financial statements as a result of this increase. For example, the impact this may have on debt covenants, EBITDA and other non-tax considerations.
Be sure to speak with your tax advisor about how these changes may affect your situation. Email Jim Forbes or call 440-449-6800 to learn how you can save on your taxes and stay compliant with government regulations.