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Tax Tip Tuesday: De Minimis Business Expenses

de minimis business expenses

Congress has yet to pass the extenders legislation so we still do not know if bonus depreciation or section 179 will go above its current limit of $25,000 for 2015. However the IRS released a notice last week that does offer some relief in this area going forward.

As an alternative to the general capitalization rule, the final regulations permits businesses to elect to expense their outlays for “de minimis” business expenses. The IRS has announced an increase, from $500 to $2,500 in the de minimis safe harbor limit for taxpayers that don't maintain an applicable financial statement (AFS).

According to IRS, this change will simplify the paperwork and recordkeeping requirements for small business and other taxpayers. If the taxpayer is eligible for the de minimis safe harbor election and chooses it, an amount paid to acquire or produce any eligible unit of property (UOP) is deducted in the year paid or incurred.

The de minimis safe harbor applies to an amount paid during the tax year to acquire or produce a UOP only if:

  1. At the beginning of the tax year, the taxpayer has written accounting procedures treating as an expense for non-tax purposes amounts paid for property costing less than a specified dollar amount; or with an economic useful life of 12 months or less.

  2. The taxpayer treats the amount paid for the property as an expense on its AFS (such as a financial statement required to be filed with the Securities and Exchange Commission, or a certified audited financial statement accompanied by an independent CPA's report and used for credit or reporting purposes) if it has one (or on its books and records if it does not) in accordance with its accounting procedures.

  3. If the taxpayer has an AFS, the amount paid for the property does not exceed $5,000 per invoice (or per item as substantiated by the invoice); or if the taxpayer does not have an AFS, does not exceed $2,500 per invoice (or per item as substantiated by the invoice); or other amount as identified in published IRS guidance.

The de minimis safe harbor was intended as an administrative convenience to permit a taxpayer to deduct small dollar expenditures for the acquisition or production of new property, or for the improvement of existing property, which otherwise must be capitalized.

This increase is effective for costs incurred during tax years beginning on or after January 1, 2016, but use of the new threshold won't be challenged in tax years prior to 2016.

Disclaimer: The items included in the Tax Tip Tuesday Video Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation. IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advise contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein

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