Increased asset deductions in the current year
New rules allow for increased current year deductions
And why Christine Merson is my hero of the day.
It’s not every day that someone representing the IRS’s Office of Associate Chief Counsel makes it to my list of heroes but today is a special day. You see, Christine Merson of the IRS’s office represents hope that other members of government agencies might be willing to look beyond the halls of their own hallowed institutions and consider the perspective of real businesses and the companies they serve. It seems Christine is a rare breed of bureaucrat who actually listens to reason.
So here’s the story of how Christine made it to my list.
The Law
In September of 2013, the IRS issued a set of regulations designed to address the tax treatment of amounts “paid to acquire, produce or improve tangible property.” These regulations included a host of rule changes and filing requirements along with hefty implications for failure to comply. But they also included a set of “de minimis” (meaning minimal or trivial amount) exceptions to the sometimes onerous requirements that would allow deductions for current year expenditures.
Safe Harbor
In the case of expenditures for tangible assets, different de minimis rules apply:
- If you had what the IRS called an AFS (Applicable Financial Statement which is generally an audited financial statement), you were allowed to deduct up to $5,000 of qualifying investments in tangible property. Among other requirements, the IRS mandated that the same expense treatment (full current year write-off) apply to financial statement reporting. So if you deducted a $5,000 equipment purchase for tax purposes, your current year audited income statement must also reflect the full $5,000 of expense.
- For taxpayers without audited financial statements, the IRS offered a $500 per item or invoice safe harbor threshold. This meant that qualifying asset purchases of $500 or less could be expensed in the year of acquisition. And these purchases, if otherwise qualified as business expenditures, would not be subject to IRS audit under the capitalization rules.
Outrage
The $4,500 disparity between safe harbor deductions came down to the difference between those who could afford an audit and those who couldn’t. Small businesses and the American Institute of Certified Public Accountants cried foul.
Response
Based on what one an only imagine must have been a horrific outcry from the general public, the IRS has now decided to allow all taxpayers a safe harbor of $2,500 per item or invoice for deducting expenditures “made for the acquisition or production of newly acquired property or for the improvement of existing property, which otherwise must be capitalized”. These safe harbor amounts technically apply for tax years beginning in January 2016 or later, but they can also be applied to prior tax years without fear of reprisal in the event of an IRS audit.
Christine authored the document and explained her reasoning as follows:
Change in Policy
“Having considered taxpayers’ comments, the goal of the final tangible property regulations to reduce administrative burden, and the concern that taxpayers’ methods of accounting clearly reflect income, the de minimis[i] safe harbor limitation for a taxpayer without an AFS (Appropriate Financial Statement) is increased from $500 to $2,500.”[ii]
Let’s hear it for Christine!
Time to Update your Policy
The IRS rules require that, in order to take advantage of the de minimis exceptions, each business must establish a capitalization policy at the beginning of each year. Companies who have a current policy of capitalizing asset purchases of $500 or more per item or invoice may be eligible for a raise in this threshold. Make sure to establish your 2016 threshold before the year begins. Consult your tax professional to discuss the capitalization policy appropriate for your business.
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