IRS Announces Higher De Minimis Safe Harbor for Tangible Property Expensing

The IRS announced on Nov. 24 that it will raise the deductible amount for purchases of tangible property by taxpayers without applicable financial statements (AFSs) to $2,500 per item, an increase from $500 (Notice 2015-82). The IRS made the change after receiving more than 150 comments recommending that the limit on deductions for purchases of tangible property be raised to anywhere between $750 and $100,000.

Under the tangible property regulations, to reduce compliance burdens, taxpayers can elect to currently deduct expenses for the purchase of tangible property that would otherwise have to be capitalized. For taxpayers without AFSs, that election was limited to $500 per invoice or per item. (For taxpayers with AFSs, the limit is $5,000, which the IRS justifies as warranted because those taxpayers are more likely to follow GAAP rules.) After the regulations were issued, many practitioners objected to the $500 de minimis amount, pointing out, among other things, that a typical computer or smartphone usually costs more than $500.

The AICPA advocated for raising the de minimis threshold to $2,500, sending a letter on Oct. 8, 2014, to the IRS urging the increase. In that letter, the AICPA argued that the $500 threshold was too low to do much to reduce the burden of complying with the complex capitalization rules. The AICPA also noted that the safe harbor effectively imposes a clear reflection of income test on small businesses for expenses over the then-$500 threshold, while larger businesses, with AFSs, 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 new de minimis amount applies to costs for tax years beginning on or after Jan. 1, 2016, but the IRS will not raise the issue of a higher amount during an audit for earlier tax years and will not further pursue the issue for any tax year beginning after Dec. 31, 2011, and ending before Jan. 1, 2016, for any case pending in IRS examination, Appeals, or the Tax Court.