IRS Eases Administrative Burdens for Small Businesses

In a move designed to ease the paperwork and record keeping burdens faced by small businesses, the IRS on November 24 announced an increase to the de minimis safe harbor thresholds that permit taxpayers to fully deduct expenditures for certain capital items. Under the new rule, businesses that do not normally maintain audited financial statements will be able to deduct up to $2,500 spent “to acquire, produce or improve tangible property that would normally qualify as a capital item.” Without the safe harbor, businesses would be required to capitalize these expenditures and take depreciation deductions over several years. Commissioner John Koskinen called the change an “important step [that] simplifies taxes for small businesses, easing the record keeping and paperwork burden on small business owners and their tax preparers.”

The change, set forth in Notice 2015-82, comes in response to taxpayer comments observing that the $500 threshold established by the 2013 final tangible property regulations was too low. See Treas. Reg. § 1.263(a)-1(f)((i)(ii)(D), effective for tax years beginning in 2014. Commenters noted in part that costs of many commonly expensed items such as tablets, smart phones, and machinery and equipment parts, typically cost more than $500. Commenters also pointed out that a $500 threshold would be ineffective to reduce administrative burdens as intended by the final tangible property regulations. The regulations permit the IRS to adjust the thresholds through guidance published in the Federal Register or the Internal Revenue Bulletin.

The change is effective for tax years beginning in 2016. However, the IRS will not challenge the use of the new $2,500 threshold for earlier years. The change does not affect the $5,000 threshold applicable to companies that do maintain audited financial statements.

Longman & Van Grack’s Tax Attorneys regularly represent clients in many different tax matters and are very familiar with the IRS Offer in Compromise program. Sat Nam Khalsa has helped many clients through countless tax matters. If you would like to contact Sat Nam or one of our attorneys, you can reach us at (301) 291-5027.