by Carmen S. Jaeger, Senior Manager at Gordon Advisors, P.C.
For business owners, Section 162 of the Internal Revenue Code is no stranger, whether you know it or not. This code section allows you to deduct all the ordinary and necessary expenses you incur during the taxable year to carry on your trade or business. These costs would include certain materials, supplies, repairs, and maintenance. We like this section!
Section 263(a) and underlying regulations require the capitalization of costs of acquiring, producing, and improving tangible property, regardless of the size or the cost incurred.
The ambiguity of these laws has often left taxpayers in a quandary in regards to whether certain expenses were to be immediately deducted or capitalized. We were guided by often conflicting case law or administrative rulings on specific factual situations.
In 2013, Treasury issued the final tangible property regulations which are effective for taxable years beginning on or after January 1, 2014. Included in these regulations is a “de minimis safe harbor” election, which allows taxpayers to deduct in accordance with IRC Section 162, amounts under a certain threshold paid to acquire or produce tangible property.
Most recently (Notice 2015-82), the IRS has increased the threshold for the safe harbor election. For tax years beginning on or after January 1, 2016, the threshold was increased from $500 to $2,500 per invoice or item for taxpayers without an applicable financial statement. The threshold for companies who have an applicable financial statement remains at $5,000.
What does this mean for a business owner? Hopefully this means less accounting, less time, less ambiguity, more direction, and more deductions! In simple terms, a business can deduct (not capitalize) any expense less than the threshold amount. This will hopefully lessen the burden of tracking smaller items on your depreciation schedules, while potentially providing a bigger tax deduction in the year of the purchase.
Also, it is important to note that even though the increased threshold is effective for tax years beginning after January 1, 2016, the IRS has stated that they will provide audit protection to eligible businesses by not challenging the use of the $2,500 threshold for tax years ending before January 1, 2016.
To make the election, you need to attach a statement to the timely filed original tax return (including extensions) for the taxable year in which the de minimis amounts are paid.
If you have questions, or need additional help on determining if and how these regulations apply to you, we are here to help. Please call us!