The IRS recently announced that it will raise the de minimis safe harbor threshold for tangible property to $2,500 per item for small business taxpayers who do not maintain an applicable financial statement (AFS).

This increased threshold will continue to apply to “small dollar expenditures for the acquisition or production of new property or for the improvement of existing property, which otherwise must be capitalized,” according to a statement from the IRS.

This tangible property threshold, previously $500 per item for taxpayers without an AFS, was raised to $2,500 by the IRS to reduce administrative burden on small business owners.  The de minimis safe harbor threshold for taxpayers with an AFS remains at $5,000 per item.

How Will The Increased Threshold Affect My Business?

• Qualifying capital expenses below the $2,500 per item threshold can be deducted immediately, rather than deducted over years through annual depreciation.
  • This will not affect your ability to deduct other repair/maintenance expenses that exceed the safe harbor threshold.
• Written expense policies should be updated to reflect this change.
• The change in the de minimis safe harbor threshold will affect financial statement reporting, so business owners should consider how use of the higher threshold could affect loan covenants.

When Can I Use the New Threshold?

• The new threshold of $2,500 will be applicable for expenses in tax years beginning on or after Jan. 1, 2016. The IRS says it will offer audit protection by not challenging the use of this threshold when auditing tax years preceding 2016.

We hope this information has been helpful to you.  If you have questions about how this de minimis safe harbor threshold change will affect your business, please contact your Whalen & Company representative.

More Information:

• Official Notice from IRS
• Article: “IRS Raises Safe Harbor Threshold for Tangible Property Expensing to $2,500” CPA Practice Advisor