Businesses are now able to take an immediate tax deduction for all tangible assets they acquire which individually cost less than $2,500. This regulation was released recently by the IRS and is extremely taxpayer-friendly.
What Are the Changes Made to the Tangible Property Regulations?
The change announced by the IRS is part of the capitalization and deductions for tangible property regulations and apply to anyone that incurs amounts to acquire, produce, or improve tangible real or personal property. The former safe harbor threshold for capitalization was $500 and is now $2,500 for companies that do not have audited financial statements. The capitalization threshold for companies that do have audited financial statements remains at $5,000. This means businesses may immediately deduct expenditures on items supported by an invoice costing less than $2,500 each instead of capitalizing the asset and depreciating it. This expanded deduction should be considered before Section 179 or Bonus Depreciation.
What Is the Impact on Your Business?
Tangible business property purchases within the de minimis safe harbor threshold include: computers and office equipment, furniture, machinery, equipment parts and land improvements. It is important to note that this regulation would impact general ledger fixed asset accounting as well since business owners must treat them as current expenses.
What Should Your Next Steps Be?
The new $2,500 threshold began on January 1, 2016. The IRS has indicated that it will not challenge prior year returns that the $2,500 threshold was used, so returns for 2015 may begin to apply this change as long as there is a formal capitalization policy in place at year end. Small business owners should review their capitalization policies with their tax advisor before closing their 2015 books. Also, they should examine any fixed asset additions for 2015.
The Brown Schultz Sheridan & Fritz Tax Team is dedicated to aid in business growth and education pertaining to the changes to the asset regulations. Contact your BSSF tax advisor for help to maximize the benefit of this change on your business’ taxes.
ABOUT THE AUTHOR
Alex is a Staff Accountant with Brown Schultz Sheridan & Fritz. He specializes in providing audit services to for-profit organizations across various industries.