Effective for years beginning January 1, 2015, the Internal Revenue Service presented taxpayers with an incredibly complex set of depreciation rules (the tangible property regulations) that essentially applied to every taxpayer holding tangible depreciable assets. Compounding issues with the implementation and application of the new rules was the broad reach to businesses of all sizes and the very minimal safe harbor for asset write-offs. The rules, as promulgated by the IRS, allowed a de minimis write-off of only $500. Thus, the impact of the rules was deemed by many as harsh as they applied to the smallest of enterprises.
Earlier this week, the IRS, via the release of Notice 2015-82 elected to simplify the paperwork and recordkeeping requirements for small businesses by raising the safe harbor threshold for deducting certain capital items from $500 to $2,500. This important change will prove helpful to many smaller business taxpayers.
The change affects businesses that do not maintain an applicable financial statement such as an audited financial statement. It applies to amounts spent to acquire, produce or improve tangible property that would normally qualify as a capital item.
The new $2,500 threshold applies to any such item that is 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.
In comments offered at the release of the Notice, Commissioner John Koskinen noted, “We received many thoughtful comments from taxpayers, their representatives and the professional tax community.” He added, “This important step simplifies taxes for small businesses, easing the recordkeeping and paperwork burden on small business owners and their tax preparers.”
As before, businesses can still claim otherwise deductible repair and maintenance costs, even if they exceed the $2,500 threshold.
The new $2,500 threshold takes effect starting with tax year 2016. In addition, and importantly, the Internal Revenue Service 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.
Questions and comments may be directed to Bob Grossman or Rick Dynoske at 412.338.9300.
