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IRS Raises $500 De Minimis Threshold to $2,500 for Tangible Property Purchases

November 30, 2015

The IRS has increased the de minimis threshold in efforts to ease the record keeping burdens faced by small businesses.

This past Tuesday, November 24th, the IRS announced that it will raise the deductible amount for tangible property purchases made by taxpayers without applicable financial statements (AFSs). After receiving multiple comments requesting that the limit on deductions for purchases of tangible personal property be raised, the IRS decided to make the change.

More about tangible property regulations

Taxpayers are typically required to capitalize amounts paid to produce or acquire a unit of real or personal property. The safe harbor for purchases of tangible property allows taxpayers to elect to immediately deduct expenses for a tangible property purchase that would otherwise have to be capitalized—in order to reduce the compliance burden. The limit on this election is $5,000, but until now, taxpayers without AFSs were limited to an election of only $500 per invoice or per item.

Why was the change needed?

  • Many objected to the $500 threshold, saying that numerous items needed in their business exceeded the $500 amount (like the average smartphone, computer, machinery and equipment parts).
  • Other commenters complained that the $500 de minimis amount did not agree with the financial accounting policies of many small businesses who often permit the deduction of amounts exceeding $500 as “immaterial”.
  • The IRS was further urged to increase the de minimis amount when the AICPA sent a letter October 8th, 2014 advocating for the increase, saying that the $500 threshold was too low to reduce burdensome compliance requirements placed on small businesses under the repair regulations.

What are the changes?

For taxpayers without applicable financial statements:

  • The de minimis amount, or the deductible amount for purchases of tangible property, has increased from $500 to $2,500 per item.
  • The de minimis amount will apply to costs for tax years beginning on or after January 1st, 2016

The new threshold will allow small businesses to immediately deduct many expenses that would normally need to be stretched over a period of time through annual depreciation deductions, which was a huge administrative burden. This is an important simplification for small business owners and their tax preparers.

The IRS has also stated that it will not raise the issue of a higher amount during an audit for earlier tax years.

Check out IRS Notice 2015-82 for more details on the change.

Questions? Contact any member of our Tax Services Team.

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