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IRS Increases Tangible Property De Minimis Safe Harbor Threshold for Taxpayers Without an Applicable Financial Statement.

(Parker Tax Publishing December 8, 2015)

For tax years beginning in 2016, the IRS has increased the threshold for applying the Reg. Sec. 1.263(a)-1(f) de minimis safe harbor for taxpayers without an applicable financial statement from $500 to $2,500 per invoice or item. Notice 2015-82.

The IRS has increased the threshold for applying the Reg. Sec. 1.263(a)-1(f) de minimis safe harbor to deduct the costs of certain tangible property acquired or produced by taxpayers without an applicable financial statement (AFS) from $500 to $2,500 per item or invoice. The increase is effective for costs incurred during tax years beginning on or after January 1, 2016.

Practice Aid: Taxpayers are required to make an affirmative election in order to avail themselves of the de minimis safe harbor under Reg. Sec. 1.263(a)-1(f). The election is made by attaching a statement to the taxpayer's timely filed original federal tax return (including extensions) for the tax year in which these amounts are paid. See Parker Tax ¶ 320,216 for a sample election statement.

Background

The 2013 tangible property regulations added a de minimis safe harbor election under Reg. Sec. 1.263(a)-1(f) that permits a taxpayer to not capitalize, or treat as a material or supply, certain amounts paid for tangible property that it acquires or produces during the tax year, provided the taxpayer meets certain requirements and the property does not exceed certain dollar limitations. If such requirements are met, amounts paid for the qualifying property generally may be deducted under Code Sec. 162, provided the amount otherwise constitutes an ordinary and necessary business expense in carrying on a trade or business.

Under the 2013 regulations, a taxpayer without an AFS may elect to apply the de minimis safe harbor if, in addition to other requirements, the amount paid for the property subject to the de minimis safe harbor does not exceed $500 per invoice (or per item as substantiated by the invoice). In contrast, a taxpayer with an AFS may elect to apply the de minimis safe harbor if, in addition to other requirements, the amount paid for the property does not exceed $5,000 and the taxpayer treats the amount paid as an expense on its AFS in accordance with its written accounting procedures.

An AFS includes a financial statement required to be filed with the SEC, as well as other types of certified audited financial statements accompanied by a CPA report, including a financial statement provided for a loan, reporting to shareholders, or for other non-tax purposes. An AFS also includes a financial statement required to be provided to a federal or state government or agency other than the IRS or the SEC.

Safe Harbor Threshold Increased for Taxpayers Without an Applicable Financial Statement

The IRS notes that the de minimis safe harbor was intended as an administrative convenience to allow taxpayers to deduct small dollar expenditures for the acquisition or production of new property or for the improvement of existing property rather than having to capitalize such amounts. After issuing the tangible property regulations, the IRS said it received numerous letters from representatives of small business taxpayers requesting that the de minimis safe harbor limit be increased for taxpayers that do not have an AFS.

Generally, the IRS stated, commenters wrote that the $500 limitation was too low to effectively reduce the administrative burden of complying with the capitalization requirement for small business taxpayers that frequently purchase tangible property in their trades and businesses. Commenters noted that the cost of many commonly expensed items (for example, tablet-style personal computers, smart phones, and machinery and equipment parts) typically surpassed the $500 per item or invoice threshold. Commenters also stated that the $500 threshold did not correspond to the financial accounting policies of many small businesses, which frequently permit the deduction of amounts in excess of $500 as immaterial.

Commenters additionally noted that without an increase in the de minimis safe harbor limit for taxpayers without an AFS, a capitalization threshold in excess of $500 can only be substantiated by establishing that a taxpayer's policy results in the clear reflection of income for federal income tax purposes, resulting in additional burden and uncertainty for taxpayers. Finally, many commenters expressed concern regarding the disparate treatment of taxpayers with an AFS compared to those without an AFS under the safe harbor requirements, stating that obtaining an AFS is cost prohibitive for many small businesses and did not adequately justify the substantially lower de minimis ceiling for those taxpayers.

In response to these concerns, the IRS has, effective for costs incurred during tax years beginning on or after January 1, 2016, increased the Reg. Sec. 1.263(a)-1(f) de minimis safe harbor limitation for a taxpayer without an AFS from $500 to $2,500.

For taxpayers with an AFS, the limitation remains $5,000.

Audit Protection for Years Prior to 2016

The IRS states that for tax years beginning before 2016, it will not raise on examination the issue of whether a taxpayer without an AFS can utilize the de minimis safe harbor for an amount not to exceed $2,500 per invoice or item if the taxpayer otherwise satisfies the requirements of the safe harbor. Moreover, if the taxpayer's use of the de minimis safe harbor is an issue under consideration in examination, appeals, or before the Tax Court in a tax year that begins after December 31, 2011, and ends before January 1, 2016, the issue relates to the qualification under the safe harbor of an amount that does not exceed $2,500 per invoice or item, and the taxpayer otherwise satisfies the requirements of the safe harbor, the IRS said it will not further pursue the issue.

For a discussion of the de minimis safe harbor, see Parker Tax ¶99,550. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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