Tax Alert – IRS Raises Safe Harbor Threshold

As of November 24th 2015, the IRS has significantly increased the de minimus safe harbor limit for taxpayers without an applicable financial statement (AFS). While the final Tangible Property Regulations initially capped such deductions at $500, this notice raises the threshold to $2,500 per item substantiated by an invoice. This will allow for the immediate deduction of many tangible property items that would otherwise remain left to slowly depreciate.

Small businesses have petitioned the IRS for an increase in this limit for some time, stating that the cost of many commonly expensed items certainly exceed the $500 threshold (tablets, smartphones, etc.) Furthermore, they argued that the limit was too low to effectively decrease the administrative burden on small businesses, an expressly stated purpose of the final TPRs. Finally, many commenters noted that the discrepancy between the $5,000 threshold established for taxpayers with an AFS and the $500 threshold established for non-AFS taxpayers was simply unreasonable. Obtaining an AFS is financially prohibitive for many small businesses, and those taxpayers felt unfairly penalized by the significantly lower non-AFS threshold.

The new $2,500 threshold takes effect beginning in tax year 2016. Furthermore, the IRS will provide audit protection to eligible businesses by not challenging their use of the new $2500 threshold in tax years prior to 2016.