On November 24, 2015, the IRS issued notice 2015-82 which will help to simplify the tracking and record keeping requirements for small businesses by raising the safe harbor threshold for capitalizing certain capital items from $500 to $2,500.
This change will affect businesses that do not have an applicable financial statement (audited financial statement). For those businesses that have an annual audit, the threshold will remain the same at $5,000.
The threshold will apply to amounts spent to acquire, produce or improve tangible property that would otherwise be considered a capital item. This change will allow items that fall under the $2,500 threshold to be expensed in the current year, rather than having to be capitalized and depreciated over the life of the asset.
This change was brought on by numerous requests and comments from small business representatives and comment letters from many within the accounting industry who noted that the $500 limitation was too low to effectively reduce the administrative burden of complying with the capitalization requirement for small businesses and was not consistent with the GAAP accounting policies of the businesses.
IRS notice 2015-82 is effective for costs incurred during taxable years beginning on or after January 1, 2016. However, the IRS notice also gives audit protection to taxable years beginning before January 1, 2016 and explains that the IRS will not raise upon examination the issue of whether a taxpayer without an applicable financial statement can utilize the new safe harbor of $2,500 as long as all the other requirements of the safe harbor are met and the taxpayer otherwise satisfies the requirements of IRC section 1.263(a)-1(f)(1)(ii). These requirements include having in place as of the beginning of the taxable year accounting procedures defining the capitalization policy threshold at $2,500.
For taxpayers that had adopted a capitalization policy of $500 to be in compliance with the regulations, it is recommended that a new policy be adopted at the $2,500 threshold effective January 1, 2016. For a sample policy click here.
It should also be noted that the new changes do not apply to California personal property tax computations. California personal property taxes have their own standards for reporting governed under Property Tax Rule 201. Rule 201 provides that all California property not otherwise exempted (and in total over reporting threshold) is to be taxed. As a result, total cost of all business property owned January 1 of each year should be included on the reporting unless exempt from a statutory exclusion or reported elsewhere. There are no de minimis exceptions to personal property tax reporting if requirement to file is met.
If you have any questions or need further explanation, please give us a call. Don’t let the IRS stress you out, we’re here to help, so that you can relax.