Carol McAtee & Associates, CPAS
More detailed de minimus safe harbor information for your consideration as to how it may apply to and benefit you…..
De Minimis Safe Harbor for Expensing Increased
The IRS increased from $500 to $2,500 the maximum threshold for expensing certain capital items under the de minimis safe harbor (provided in Reg. 1.263(a)-1(f)) in Notice 2015-82, IRB 2015-50) for effective for tax years beginning on or after January 1, 2016. The threshold for taxpayers with an applicable financial statement (AFS) remains set at a maximum of $5,000 per invoice (or per item as substantiated by the invoice). For tax years beginning before January 1, 2016, the IRS will not raise the issue of whether a taxpayer without an AFS can utilize the de minimis safe harbor for an amount that does not exceed the new $2,500 limit, as long as the taxpayer otherwise satisfies the requirements for using the safe harbor.
Business Expenses
The repair regulations provide a de minimis safe harbor election, which will enable taxpayers to deduct up to $2,500 per invoice for amounts paid or incurred to acquire or produce a unit of tangible property, provided the taxpayer is not required to have an AFS financial statement; has written accounting procedures for expensing amounts paid or incurred for such property under certain dollar amounts; treats such amounts as expenses on its AFS in accordance with its written accounting procedures; and paid no more than $2,500 per invoice (or per item as substantiated by the invoice) [Reg. 1.263(a)-1(f)(1)(i)]. Moreover, taxpayers can take advantage of the election for an unlimited number of invoices, increasing their immediate deduction for business equipment in excess of the Code Sec. 179 expensing limits.
If a taxpayer is required to have an AFS, the $2,500 amount is increased to $5,000.
If a taxpayer makes the de minimis safe harbor election:
- The election applies to all amounts an eligible taxpayer pays during the tax year for eligible property [Reg. 1.263(a)-1(f)].
- A covered amount is deductible in the tax year it is paid, as long as it otherwise constitutes a deductible business expense [Reg. 1.263(a)-1(f)(3)(iv)].
- A covered amount cannot be treated as a capital expenditure paid for the acquisition or production of a unit of tangible property under Reg. SS1.263(a)-2(d)(1) or 1.263(a)-3(d) [Reg. 1.263(a)-1(f)(3)(iv)].
- Upon its sale or other disposition, property that was subject to the safe harbor is not treated as a capital asset under Code Sec. 1221, or as property used in the trade or business under Code Sec. 1231[Reg. SS1.263(a)-1(f)(3)(iii)].
AFS Defined
Reg. 1.263(a)-1(f)(4) defines an AFS as one of the following:
- A financial statement that must be filed with the SEC (Form 10-K or the annual statement to shareholders)
- A certified audited financial statement that is accompanied by the report of an independent Certified Public Accountant (or in the case of a foreign entity, by the report of a similarly qualified independent professional) and is used for credit purposes, reporting to shareholders, partners or similar persons, or any other substantial non-tax purpose
- A financial statement other than a tax return that must be provided to any federal or state government agency other than the SEC or the IRS
Additional Costs
The de minimis safe harbor can also apply to additional costs incurred facilitating the acquisition or production of the tangible property that is covered by the de minimis safe harbor, as well as to the costs for work performed before the date the tangible property is placed in service, as follows:
- The cost of tangible property covered by the safe harbor includes all additional costs that are included on the same invoice with the tangible property, including delivery fees, installation services or similar costs.
- An electing taxpayer may, but is not required to, extend the safe harbor to additional costs of acquiring or producing the property that are not included in the same invoice at the tangible property.
- When an invoice includes multiple tangible properties and additional invoice costs related to them, the taxpayer must allocate the additional invoice costs to each property using a reasonable method including, but not limited to, specific identification, a pro rata allocation or a weighted average method based on the property’s relative cost. Each property, including allocable labor and overhead, must be eligible for the safe harbor [Reg. 1.263(a)-1(f)(3)(i)].
Materials and Supplies
If a taxpayer elects to apply the de minimis safe harbor, the taxpayer must also apply the de minimis safe harbor to amounts paid for all materials and supplies [Reg. 1.263(a)-1(f)(3)(ii)].
Exclusions
The safe harbor is unavailable for amounts paid for property that is or is intended to be included in inventory; amounts paid for land; amounts paid for rotable, temporary and standby emergency spare parts that are capitalized and depreciated; and amounts paid for rotable and temporary spare parts accounted for under the optional method of accounting for rotable parts [Reg. 1.263(a)-1(f)(2)].
Taxpayer without an AFS
Under the safe harbor provided in Reg. 1.263(a)-1(f)(1)(ii)(D), 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 $2,500 per invoice (or per item as substantiated by the invoice). In contrast, under Reg. 1.263(a)-1(f)(1)(i)(D), 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 according to it written accounting procedures. A large safe harbor limitation is reasonable for a taxpayer with an AFS because an AFS provides independent assurance that the taxpayer’s de minimis policies are consistent with the requirements of generally accepted accounting principles and do not materially distort the taxpayer’s financial statement income.
Election Required
The de minimis safe harbor must be elected annually by including a statement with the taxpayer’s tax return for the year elected. The irrevocable election applies to all qualifying expenses, including qualifying materials and supplies other than rotable and temporary spare parts. An election to use the safe harbor may not be made by filing an application for change in accounting method. A late election may be made on an amended return only with IRS consent [Reg. 1.263(a)-1(f)(5).]
Audit Protection
For tax years beginning before January 1, 2016, the IRS will not raise 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 per item as substantiated by invoice) if the taxpayer otherwise satisfies the safe harbor requirements. Moreover, the IRS will not further pursue the issue if the taxpayer’s use of the de minimis safe harbor is an issue under consideration in examination, in appeals or before the U.S. Tax Court in a tax year that begins after December 31, 2011, and ends before January 1, 2016.
If you have any questions about this topic or other tax related questions, please do not hesitate to contact us at 727-327-1999.
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER, OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
