Calvetti Ferguson

Increase in De Minimis Safe Harbor Limit

Increase in De Minimis Safe Harbor Limit for Taxpayers Without an Applicable Financial Statement
-Lori Morales, CPA

In late December, in response to numerous comments from tax professionals, the IRS issued Notice 2015-82 effectively increasing the de minimis safe harbor limit from $500 to $2,500 for taxpayers without an applicable financial statement. The safe harbor limit for taxpayers with an applicable financial statement remains unchanged at $5,000.

While the new threshold is effective for tax years beginning on or after 1/1/16, the IRS has stated that they will provide audit protection to qualified taxpayers by not challenging the use of the new $2,500 threshold in tax years prior to 2016.

In other words, qualified taxpayers may elect to expense up to $2,500 per invoice or per item on their 2015 tax returns.

BACKGROUND
On September 17, 2013, the Treasury Department and the Internal Revenue Service (“IRS”) issued final regulations to provide guidance on the application of §162(a) and §263(a) of the Internal Revenue Code (“Code”) to amounts paid to acquire, produce, or improve tangible property (“final tangible property regulations”), commonly referred to as the “repair regs”. The final tangible property regulations are applicable to taxable years beginning on or after January 1, 2014. Optionally, a taxpayer may choose to apply the final tangible property regulations to taxable years beginning on or after January 1, 2012, and before January 1, 2014.

One aspect of the repair regs is the de minimis safe harbor election. This election, required to be made on an annual basis by attaching an election statement to the return, allows a taxpayer to currently deduct an expenditure that might otherwise require capitalization to the extent of the safe harbor limit.

For taxpayers with an applicable financial statement (“AFS”) the safe harbor limit is $5,000. An AFS is one of the following:

1.) Financial statement filed with the SEC,
2.) Certified audited financial statements accompanied by a CPA report (including a financial statement provided for a loan, reporting to shareholders or for other non tax purposes), and
3.) Financial statement required to be provided to a federal or state government, or an agency other than the IRS or the SEC

For taxpayers without an AFS, the safe harbor limit was originally $500 (and still is) for tax years ending on or before 12/31/15. The increase in the limit to $2,500 is applicable for tax years beginning on or after 1/1/16. However, since the IRS has already stated that they will not challenge the use of the $2,500 limit for tax years prior to 2016 for qualified taxpayers, the opportunity exists for taxpayers to take advantage of the increase in the limit on their 2015 tax returns.

By “qualified taxpayer” the IRS means a taxpayers who satisfies the requirements of Treasury Regulation §1.263(a)-1(f)(1)(ii). In order to satisfy these requirements, the taxpayer must have a capitalization policy in effect prior to the start of the tax year and the policy must be the same for both book and tax. In other words, under the de minimis safe harbor election, a taxpayer may only expense an item on their tax return if that same item is being expensed for book purposes as well. For taxpayers with an AFS, this policy must be written. For taxpayers without an a AFS the policy does not need to be written, however, you must expense amounts on your books and records for the taxable year in accordance with a consistent accounting procedure or policy for the entire year.

For more information regarding this valuable tax benefit, please contact Lori Morales, Tax Partner, Calvetti Ferguson at 713.957.2300 or lmorales@calvettiferguson.com