The IRS Issues New Administrative Authority Governing TPR De Minimis Safe Harbor Limits for Small Businesses

On November 24th of 2015, the Internal Revenue Service (hereinafter “the IRS”) streamlined the compliance for the Tangible Property Regulations (hereinafter “TPR”) for small businesses by increasing the safe harbor threshold for deducting certain capital items from $ 500 to $ 2,500 under IRS Notice 2015-82. The scope affects businesses that do not maintain an Applicable Financial Statement (hereinafter “AFS”) such as an 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 that is substantiated by an invoice. As a result, small businesses will be able to immediately deduct expenditures that would otherwise need to be spread over a period of years through annual depreciation deductions. The new $2,500 threshold takes effect starting with tax year 2016. In addition, the IRS will provide audit protection to eligible small businesses by not challenging the use of the new $2,500 threshold in tax years prior to 2016. For taxpayers with an AFS, the De Minimis Safe Harbor threshold remains at $5,000.

The IRS indicated that it received more than 150 letters from businesses and their representatives suggesting an increase in the De Minimis Safe Harbor threshold. Perhaps one of the more compelling letters came from The American Institute of CPAs (hereinafter “the AICPA”) on April 21st of 2015 that strongly recommended to the IRS that the De Minimis Safe Harbor threshold amount under the TPR be increased from $500 to $2,500 for small business entity taxpayers without an AFS. IRS Commissioner John Koskinen indicated today in a prepared statement “we received many thoughtful comments from taxpayers, their representatives, and the professional tax community, and this important step simplifies taxes for small businesses, easing the recordkeeping and paperwork burden on small business owners and their tax preparers.”

IRS Notice 2015-82 can be referenced and downloaded at https://www.irs.gov/pub/irs-drop/n-15-82.pdf