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New IRS Expensing Rules May Require Action By Year-End

December 22, 2015

Thomas J. Nichols & James W. DeCleene

Late last month, the IRS increased the cost of items that can be expensed as de minimis capital expenditures by businesses that don't have "applicable financial statements" (most small, closely held businesses) from $500 to $2,500. I.R.S. Notice 2015-82, 2015-50 I.R.B. 859. This means a business could simply treat a $2,400 purchase of a computer, for example, as an expense, rather than (a) capitalizing the cost and depreciating it over a period of years or (b) having the cost count against its section 179 capital expenditure limit ($500,000 under the most recent tax legislation). Protecting Americans From Tax Hikes Act of 2015 (P.L. TBD).

However, in order to qualify for this treatment, a taxpayer must have accounting procedures in place "at the beginning of the taxable year" that treat amounts below a specified dollar amount and/or items with an economic useful life of 12 months or less as an expense for non-tax purposes. Treas. Reg. § 1.263(a)-1(f)(1)(ii)(B)(1). Clearly, any written procedure put in place on or before January 1, 2016 should satisfy this requirement for 2016 calendar taxable years, which are the first taxable years for which this new procedure is applicable. I.R.S. Notice 2015-82, 2015-50 I.R.B. 860. The IRS will also apply the higher limit to taxable years beginning after 2011 and ending before 2016, but the accounting procedure must have been in place at the beginning of such taxable years (though this rule does not require the procedure to be in writing). I.R.S. Notice 2015-82, 2015-50 I.R.B. 860.

This new rule may not be as important for taxpayers with "applicable financial statements," who have been subject to a higher $5,000 de minimis rule, starting with 2014 calendar taxable years. T.D. 9636, 2013-43 I.R.B. 336, 358. In order to qualify for this higher limit, the accounting procedure must be in writing and the taxpayer must have "applicable financial statements," which are financial statements (a) filed with the SEC or with another federal or state government or agency (not including tax returns) or (b) otherwise certified, audited and used for credit purposes, owner reporting or any "other substantial non-tax purpose."  Treas. Reg. §§ 1.263(a)-1(f)(1)(i)(B), (4)(i)-(iii).

There are other requirements that taxpayers must meet in order to qualify for this safe harbor, including treating these amounts as expenses for book purposes. Treas. Reg. § 1.263(a)-1(f)(1)(ii)(B)-(D). For example, the taxpayer must attach a statement entitled “Section 1.263(a)-1(f) de minimis safe harbor election” to its timely filed original federal tax return (including extensions) for the taxable year in which the amounts are paid. Tangible Property Regulations – Frequently Asked Questions. In addition, some types of property do not qualify for this treatment, such as inventory and land. Treas. Reg. § 1.263(a)-1(f)(2). However, it looks like the only thing that would need to be done now in order for this increased limit to apply for 2016 calendar taxable years is the adoption of the appropriate accounting procedure on or before January 1, 2016. This could be as simple as including a piece of paper, email or other notation in a company's accounting records with the following language: “All amounts paid for property costing less than $2,500 or having an economic useful life of 12 months or less shall be treated as an expense, and not as a capital expenditure.”  Maybe printing this notice out and placing it with your accounting records would do the trick.

Thomas J. Nichols and James W. DeCleene focus their practice on business entity and tax law. For more information, please contact either one of them at tjn@mtfn.com or jwd@mtfn.com, or by calling (414) 273-1300.