On Tuesday November 24, 2015, the IRS released Notice 2015-82 (the “Notice”). The Notice increased the de minimis safe harbor limit, for businesses without “applicable financial statements”, from $500 to $2,500. As a result of the Notice, many small businesses will now be able to expense certain items that would have otherwise been depreciated over a number of years.
The de minimis safe harbor is an annual election that merely establishes a minimum threshold below which all qualifying amounts are considered deductible. The final tangible property regulations, including the de minimis safe harbor limit, applies to tax years beginning on or after January 1, 2014. Prior to the release of the Notice, the initial limit was only $500. The new $2,500 limit in the Notice is applicable for tax years beginning on or after January 1, 2016. In addition, the Notice provides some audit protection for tax years beginning prior to January 1, 2016.
Taxpayers must have an accounting policy–to expense items below the de minimis limit–in place at the beginning of the year to take advantage of the de minimis safe harbor. Although the policy does not have to be written down for taxpayers without an applicable financial statement, it is a good idea. If you do not already have a policy in place, it is a good idea to write one down before the end of 2015. Also, you still need to hold onto your receipts to substantiate the expense.
Small businesses owners should consult with their tax advisor to determine how the new limit applies to their business and whether they should make the election for each year going forward.