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Raising the threshold to $2,500 should ease the administrative burden and help small businesses take advantage of the de minimis safe harbor.

Minimizing business tax

IRS Increases Small Asset Expensing Safe Harbor

  • 12/3/2015

The IRS has increased the lower tier safe harbor amount from $500 to $2,500 for immediate deductibility of small assets, effective for years beginning on or after January 1, 2016.

The change affects any business that does not maintain an Applicable Financial Statement (an SEC statement, a certified audit, or a governmentally mandated financial statement) and applies to amounts spent to acquire, produce, or improve tangible property that would normally be capitalized and depreciated.

Deduction versus depreciation

The new $2,500 threshold applies per invoice or (per item substantiated on an invoice), and must be applied consistently for both financial reporting and tax purposes. 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 Notice says that upon examination, it will not challenge a safe harbor expensing amount of up to $2,500 for pre-2016 years, if the taxpayer has accounting procedures at the beginning of the year that treats these amounts as an expense in its non-tax books and records. This audit protection provision for pre-2016 years protects businesses that did not elect the $500 safe harbor amount previously because their practice had been to expense small assets under a greater limit, such as $1,000 or $2,000.

Businesses with an Applicable Financial Statement may have a written accounting policy, applied consistently for financial reporting and tax purposes, which allows asset acquisitions up to $5,000 per invoice, or $5,000 per item on the invoice, as a current deduction.

To use either of these de minimis safe harbors, the taxpayer must make an election by attaching a statement to a timely filed federal tax return. This election is an annual decision.

Example using the new safe harbor

Acme Construction acquires 20 new computer tablets for its field managers and estimators. The invoice reads: “20 Panasonic 8GB Toughpads at $2,200 each = $44,000.” Assuming Acme has accounting procedures in place at the beginning of the year to deduct items under $2,500, the company may expense this $44,000 invoice for tax purposes without consuming any of its Section 179 first-year expensing limitation. Acme’s tax return will require a written statement indicating that it has made an election to utilize the de minimis safe harbor for the current year. The company’s books must also reflect consistent expensing of items under $2,500.

The de minimis safe harbor does not limit a taxpayer’s ability to deduct what is otherwise an allowable repair that exceeds the safe harbor amount (e.g., a new rubber membrane replacement on a flat roof of a commercial building). The de minimis safe harbor merely establishes a minimum threshold below which all qualifying amounts are considered deductible.

How we can help

Contact your tax advisor if you have questions about adopting an increased safe harbor de minimis expensing amount for 2016 and beyond.