Businesses are now able to take an immediate tax deduction for all tangible assets they acquire which individually cost less than $2,500. This is a significant taxpayer-friendly change announced last week by the IRS. Let’s take a look at what this means for your business.
What has changed?
The change announced by the IRS is part of its regulations pertaining to capitalization and deductions for tangible assets, commonly referred to as “TARS.” The IRS has increased the so-called safe harbor threshold for capitalization from $500 to $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.
What does this mean?
This long-awaited change means businesses may immediately deduct expenditures on items substantiated by an invoice costing less than $2,500 each rather than capitalizing the asset and depreciating it over a period of years. This expanded deduction opportunity applies prior to considering whether Section 179 or Bonus Depreciation may be applicable for asset purchases that cost more than $2,500 each.
What expenditures are affected?
Examples of purchases that would fall within the de minimis safe harbor threshold include tangible business property such as:
- Computers and office equipment
- Equipment parts
- Land improvements
It is important to note that this particular TARS provision also impacts general ledger or “book” fixed asset accounting. This means that in order to use this safe harbor election, business owners must treat the item as a current expense for their books and records.
When does this take effect?
The new $2,500 threshold kicks in on January 1, 2016. However, the IRS has communicated that they will not challenge prior year returns for which the $2,500 threshold was used, so this impacts tax returns for 2015 and those still unfiled for 2014.
What are my next steps?
Small business owners should discuss and review their book and tax capitalization policies with their tax advisor prior to closing their 2015 books. Additionally, be sure to examine any fixed asset additions for 2015 with your tax advisor.
Need more information?
RKL’s Tax Services Group has a dedicated team of professionals focused on TARS and its impact on business owners. Contact your RKL tax advisor or one of our local offices for assistance maximizing the benefit of this change on your business’ taxes.
Contributed by Jolleen E. Biesecker, CPA, Manager in RKL’s Tax Services Group. Jolleen manages tax compliance and consulting engagements for business clients and their related individual owners, in addition to performing quality review for tax engagements.