On November 24, 2015, the Internal Revenue Service simplified the paperwork and recordkeeping requirements for small businesses by raising from $500 to $2,500 the safe harbor threshold for deducting certain capital items. This change impacts businesses who do not maintain an audited financial statement. The new $2,500 threshold applies to amounts paid to acquire, product or improve tangible property that would normally be required to be capitalized and depreciated. The $5,000 de minimis threshold for companies with an audited financial statement has not been changed.
In order to utilize the $2,500 expensing policy, companies must have a written policy effective at the beginning of the tax year that is applicable to both book and tax records. Furthermore, the taxpayer must make a de minimis safe harbor election on their timely filed tax return.
The IRS raised the threshold from $500 to $2,500 in response to numerous inquiries from small businesses and representatives indicating the $500 threshold was too low. The move is intended to reduce the administrative burden placed on small businesses.
The new $2,500 threshold takes effect starting with tax year 2016. In addition, the IRS will provide audit protection to eligible businesses by not challenging use of the new $2,500 threshold in tax years prior to 2016.