It’s been a battle for the ages. For years, taxpayers have bickered with the IRS over the question of “materiality”, whether the cost of certain small assets may be immediately deducted, or if the cost must be capitalized and depreciated. Taxpayers have long complained that the cost of the asset was so insignificant that to capitalize and depreciate it was more trouble than it was worth. The IRS, on the other hand, has traditionally contended that there is no such thing as materiality when it comes to asset purchases. If the asset had a useful life that extended beyond the end of the year of purchase, the taxpayer must then capitalize the cost and depreciate the asset, regardless of the purchase price. Both sides made good arguments, but in the end, IRS rulings rule the day.
When the repair regulations were finalized in August 2013, they included a “safe harbor”, aimed at putting an end to squabbles over asset purchases. Under safe harbor regulations, a qualifying taxpayer could elect to immediately deduct the cost of acquired or produced assets — or the cost of repairs that would be required to be capitalized after application of the remaining portion of the repair regulations — subject to limitation.
That limit was $5,000 if, among other things, the taxpayer had an “applicable financial statement” (i.e., a 10-K, audited financial statement, or other financial statement provided to a third party such as a bank). If there was no applicable financial statement, the final regulations dropped the safe harbor amount significantly -- all the way down to $500. IRS claimed the lack of applicable financial statement meant that the taxpayer did not have the necessary internal controls to properly monitor its expense policy. That $500 amount has been a significant burden for taxpayers, particularly small business owners.
Relief came just before Thanksgiving, however. IRS published Notice 2015-82, increasing the safe harbor amount for taxpayers without an applicable financial statement from $500 to $2,500. Now, businesses may immediately deduct expenditures on items substantiated by an invoice costing less than $2,500 each rather than capitalizing the asset and depreciating it over a period of years. Examples of purchases that would fall within the de minimis safe harbor threshold include tangible business property such as computers, office equipment, furniture, machinery and equipment parts, and land improvements. Components acquired to maintain or repair a unit of tangible property—that is, spare parts—are also eligible under the new regulations. Note that companies with audited financial statements can still deduct costs of up to $5,000 per item.
The new $2,500 threshold kicks in on January 1, 2016. IRS has communicated that it will not challenge prior year returns for which the $2,500 threshold was used, so this impacts tax returns for 2015 and those still unfiled for 2014.
Be sure to discuss your book and tax capitalization policies with your tax advisor prior to closing your 2015 books, and be sure to examine any fixed asset additions for 2015 with your tax advisor. Taxpayers who wish to take advantage of the change discussed here will need to adopt (or change) their accounting procedures to treat amounts paid for property less than $2,500 as expenses for purposes of non-tax books and records. These procedures do not have to be in writing, but they do need to be in effect at the beginning of 2016.
