Although the final regulations are most significant for fixed asset intensive industries (i.e. electric utilities, telecom, retail, etc.), or real estate property owners that consistently incur capital expenditures to maintain their facilities, small business owners are also seeing some advantages from certain aspects of the Tangible Property Regulations.
Small businesses like yours are able to deduct many expenditures immediately and accelerate the depreciation on others, rather than spread them out over a longer period of years as annual depreciation deductions.
Historically, deducting all ordinary or necessary expenses incurred during a taxable year in carrying on your trade or business – including the costs of certain materials, supplies, repairs and maintenance – is allowable, per section 162 of the Internal Revenue Code (IRC).
The De Minimis Safe Harbor Limit
The De Minimis Safe Harbor is an annual tax return election that permits taxpayers to currently deduct expenditures they would otherwise have to capitalize for the purchase of tangible property (including materials and supplies) if the taxpayer:
1. Has an accounting policy as of the beginning of the tax year to expense (for non-tax purposes) amounts paid for property costing less than a specified dollar amount, or amounts paid for property with an economic useful life of 12 months or less; and
2. Follows that policy in its books and records.
Effective for taxable years beginning on or after 1/1/16, the De Minimis Safe Harbor limit related to costs incurred in acquiring tangible personal property for small business taxpayers without an applicable financial statement has increased from $500 to $2,500.
Taken from the IRS’ website: “In addition, the IRS will provide audit protection to eligible businesses by not challenging the use of the $2,500 threshold for tax years ending before January 1, 2016 if the taxpayer otherwise satisfies the requirements of Treasury Regulation § 1.263(a)-1(f)(1)(ii).”
This threshold increase greatly simplifies taxes for small businesses, as recordkeeping and paperwork is less of a burden. You no longer have to determine whether every small-dollar expenditure for your tangible property is properly classified.
The new Tangible Property Regulations provide a number of simplifying alternatives for small business taxpayers. To ensure you identify every deduction opportunity and determine if you qualify for simplified procedures, it is recommended that you speak with a Tangible Personal Property tax expert.
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