Taxable Talk

My flight home last night was delayed, so I got the chance to read the IRS’s new de minimis rule for small businesses allowing expensing of items costing $2,500 or less. Normally when you read something that’s from the IRS, you expect to find “gotchas.”

Instead, I found good news for taxpayers. While the rule explicitly applies to tax years beginning after December 31, 2015, the IRS states,

AUDIT PROTECTION

For taxable years beginning before January 1, 2016, the IRS will not raise upon examination the issue of whether a taxpayer without an AFS can utilize the de minimis safe harbor provided in § 1.263(a)-1(f)(1)(ii) for an amount not to exceed $2,500 per invoice (or per item as substantiated by invoice) if the taxpayer otherwise satisfies the requirements of § 1.263(a)-1(f)(1)(ii). Moreover, if the taxpayer’s use of the de minimis safe harbor provided in § 1.263(a)-1(f)(1)(ii) is an issue under consideration in examination, appeals, or before the U.S. Tax Court in a taxable year that begins after December 31, 2011, and ends before January 1, 2016, the issue relates to the qualification under the safe harbor of an amount (or amounts) that does not exceed $2,500 per invoice (or per item as substantiated by invoice), and the taxpayer otherwise satisfies the requirements of § 1.263(a)-1(f)(1)(ii), then the IRS will not further pursue the issue.

This means that the new de minimis rule is really effective now, and it may make sense for some taxpayers who qualify for the de minimis rule to amend one or more prior year returns. It is the Holiday Season, and here the IRS was in the spirit of giving and wasn’t the Grinch.

The IRS today announced that the de minimis expense threshhold for small taxpayers (which is the vast majority of all taxpayers) to $2,500 from $500 for tax years 2016 onward. Note that this does not apply for 2015 returns filed in 2016. This move will allow taxpayers to expense many items that currently must be depreciated. [Update: While the rules apply for 2016 returns, the IRS says they will not examine (audit) taxpayers who use the new $2,500 de minimis rule on open tax years. Thus, the rule effectively applies for 2012 returns onward. See this update.]

The IRS announcement notes that this will simplify taxes for small businesses.

The change affects businesses that do not maintain an applicable financial statement (audited financial statement). It applies to amounts spent to acquire, produce or improve tangible property that would normally qualify as a capital item.

The new $2,500 threshold applies to any such item substantiated by an invoice. As a result, small businesses will be able to immediately deduct many expenditures that would otherwise need to be spread over a period of years through annual depreciation deductions.

“We received many thoughtful comments from taxpayers, their representatives and the professional tax community, said IRS Commissioner John Koskinen. “This important step simplifies taxes for small businesses, easing the recordkeeping and paperwork burden on small business owners and their tax preparers.“

Do note that you do need to keep a receipt (or other proof) of the expense.

The IRS apparently figured out that under a literal reading of the new property/capitalization/depreciation regulations, every business would have to submit a Form 3115. The IRS determined that being buried under a tsunami of paper wasn’t a great idea. Today, the IRS announced in Revenue Procedure 2015-20 that a business which has under $10 million of average sales (for the last three years) or less than $10 million of assets (as of the beginning of their 2014 tax year) can use a simplified method for complying with the new property regulations.

I’ve done a quick read of the new Revenue Procedure. What I suspect we will have to do is attach a statement stating that the taxpayer is an eligible taxpayer under Revenue Procedure 2015-20, and has elected to follow this Revenue Procedure to come into compliance with the regulations. This will be far easier and far more palatable to most of my clients.