Immediate Action Needed - Increased De Minimis Safe Harbor Election Available, But You Must Act Now
For the past couple of years, we've been dealing with issues surrounding the adoption of final IRS tangible property regulations, or "repair" regs for short. The IRS recently announced an important revision to the repair regs that will affect many businesses, including sole proprietors and owners of rental property.
One of the important elections under the repair regs is the ability of taxpayers to adopt a fixed asset capitalization policy that takes advantage of a de minimis safe harbor amount (DMSH) under which expenditures for tangible property would not have to be capitalized and depreciated, but instead could be immediately deducted. For taxpayers without an "applicable financial statement", or AFS, that amount was no more than $500 per invoice or per item substantiated by the invoice. As long as a taxpayer has "adopted" this as a capitalization policy and made the corresponding annual return election, such amounts are immediately deductible.
The IRS recently announced that effective January 1, 2016, for capitalization policies adopted on or before the beginning of the year, the maximum DMSH amount for taxpayers without an AFS is INCREASED to $2,500. Thus, taxpayers can adopt a capitalization policy allowing them to immediately expense and deduct up to $2,500 per invoice or per item substantiated by the invoice and avoid having to consider whether or not such expenditures have to be capitalized and depreciated.
Action Point - while the IRS does not expressly say that the adoption of the revised policy must be in writing, EGP recommends having a written adoption of the revised policy effective by the beginning of 2016, since proving adoption without it being in writing could be problematic. Please contact your EGP client service professional as soon as possible to discuss this and implement any revisions needed.
Other points to consider and know:
First, this change does not affect taxpayers who have an AFS; your limits remain the same.
Second, it is not necessarily advisable for everyone who so qualifies to adopt this increased amount. For instance, one of the requirements for qualifying for the DMSH is that the same capitalization policy must be used for any non-tax books and records or financial statements. So, for example, if you have a compiled or reviewed financial statement that you provide to creditors, you must expense the same amounts on those financials as you do for your tax return, and this could affect how your creditors view those financials. Issues such as this need to be discussed with your advisor.
Lastly, the IRS has said that it will provide audit protection and not challenge any taxpayer who had earlier adopted a capitalization policy for a year before 2016 that was in excess of the old $500 DMSH but equal to or less than the new $2,500 DMSH.
EGP is ready to help you analyze and address issues you have regarding this and to assist you in implementing any needed changes. Please contact us as soon as possible because, again, these changes, if desired, must be adopted prior to 1/1/16 if they are to be effective for the 2016 tax year.
