On November 24th, the IRS announced a taxpayer favorable change to the de minimis safe harbor limits for deducting materials and supplies and other small personal property items.
Up until the announcement on November 24th, taxpayers could deduct any material, supply, or personal property up to $500 per invoice (or per item, validated by an invoice) if the taxpayer did not have an audited financial statement. This was known as the de mininis safe harbor election. In order to benefit from the de minimis safe harbor election, taxpayers are required to have a policy in place stating that all personal property purchased at or below the dollar limit are required to be expensed.
On November 24th, the IRS announce that they will increase the de minimis safe harbor limit from $500 to $2,500 for taxpayer years beginning on January 1, 2016 and later. In addition, the IRS stated that for tax years prior to 2016, if adequate documentation is kept to support the expense, they will allow deductions up to $2,500 per item under the safe harbor election.
What does this mean for you?
This means that taxpayers will not be required to capitalize as many assets as they have in the past. For example, if a taxpayer purchases a new computer for $1,000 and makes the de minimis safe harbor election, the taxpayer would be allowed to deduct the entire cost of the computer in the year the computer was purchased. In the past, the taxpayer would have been required to capitalize the computer and deprecate it over five years.
Another example would be if an owner of a commercial or resident real estate rentals (including multi-family) were to purchase replacement items such as flooring, refrigerators, carpeting that cost less than $2,500 per item. Under the increased limits, such items would be deductible in the current year and not required to be capitalized.
One note of caution is that even though taxpayers are allowed to deduct the expense for small personal property items, local taxing authorities will still require such items to be included on the taxpayer’s personal property tax return.
If you have questions or need further clarification on how this new change will affect your business please contact Eric Bell.