Jeffery Porter, CPA, chair of the AICPA’s Tax Executive Committee, wrote to Andrew Keyso, IRS associate chief counsel, on Wednesday, raising the AICPA’s concerns about the low amount of the de minimis safe harbor threshold in the tangible property regulations (T.D. 9636) that were issued in September 2013, and about the retrospective application of the new rules.
The de minimis safe harbor allows taxpayers without an applicable financial statement to deduct amounts paid for property if the amount does not exceed $500 per invoice, or per item as substantiated by the invoice. Porter asked the IRS to increase that amount to $2,500 and recommended that the threshold be adjusted annually for inflation. Porter noted that the $500 threshold is too low to do much to reduce the burden of complying with the complex capitalization rules.
He also noted that this safe harbor effectively imposes the clear reflection of income test on small businesses for expenses over the $500 threshold, while larger businesses, with applicable financial statements, are subject to that test at a higher ($5,000) threshold, imposing a burden on small businesses that is not imposed on larger businesses that purchase items that are the same or similar in nature.
The AICPA letter also recommended that the IRS should allow small businesses to apply the tangible property regulations prospectively, without having to calculate adjustments for prior-year tangible property costs. The AICPA recommends that small businesses should be allowed either (1) to adopt the rules prospectively without having to compute a Sec. 481(a) adjustment or file Form 3115, Application for Change in Accounting Method, or (2) to adopt the rules prospectively without having to compute a Sec. 481(a) adjustment but with a Form 3115 filing, giving audit protection on a “cut-off” basis.
Porter urged the IRS to act quickly on these recommendations because small businesses will incur significant burdens in transitioning to the new rules between now and the next filing season.