Tangible Property Expensing Threshold Increases

The safe harbor threshold for small businesses deducting certain capital items has increased from $500 to $2,500. The new $2,500 threshold takes effect starting with tax year 2016. In addition, the IRS will provide audit protection to eligible businesses by not challenging use of the new $2,500 threshold in tax years prior to 2016.

The change affects businesses that do not maintain an applicable financial statement (audited financial statement). It applies to amounts spent to acquire, produce or improve tangible property that would normally qualify as a capital item.

For taxpayers with an applicable financial statement, the de minimis or small-dollar threshold remains $5,000.

The new $2,500 threshold applies to any such item substantiated by an invoice. 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, simplifying paperwork and recordkeeping requirements.

During the February comment period, the IRS received more than 150 letters from businesses and their representatives suggesting an increase in the threshold. Commenters noted that the existing $500 threshold was too low to effectively reduce the administrative burden on small business. Moreover, the cost of many commonly expensed items such as tablet-style personal computers, smartphones, and machinery and equipment parts typically surpass the $500 threshold.

As before, businesses can still claim otherwise deductible repair and maintenance costs, even if they exceed the $2,500 threshold.

Sign up for our newsletter to receive tax tips and timely articles delivered right to your inbox.    Read more articles from our January 2016 newsletter here.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s