New Safe Harbor = Greater Tax Savings

Dec 17, 2015

In 2014, the newly effective Tangible Property Regulations (TPRs) required all taxpayers with depreciating assets to become compliant with a number of new and revised regulations regarding the capitalization of assets. The TPRs opened the door for a number of tax saving opportunities, which William Vaughan Company advisors explored for each and every affected client. One of the more significant changes instituted by the TPRs was the ability for taxpayers to make the De Minimis Safe Harbor Election. With this election, made annually when filing the tax return, taxpayers are able to immediately expense any purchases below a specified De Minimis Safe Harbor amount, allowing for a full tax saving benefit in the year the purchase is actually made. This safe harbor amount was set at $5,000 for taxpayers with Applicable Financial Statements (AFSs) and at $500 for taxpayers without AFSs. An AFS, as defined in the TPRs, is either a financial statement required to be filed with the SEC, a certified audited financial statement, or a financial statement required to be provided to the federal or a state government/agency (other than the SEC or IRS).

While the potential for tax savings was there, many argued the $500 floor for taxpayers without AFSs was too low, limiting the effectiveness of the election. One argument cited by the AICPA was that the disparity between the floors for taxpayers without AFSs and those with AFSs was imposing an unnecessary burden on small businesses. Essentially, they argued that small and large businesses are purchasing the same or similar items, but small businesses are subject to a stricter threshold when determining what is eligible for immediate expense. With this and other feedback in mind, and after much deliberation, the IRS has decided to increase the De Minimis Safe Harbor amount for taxpayers without AFSs.

For those taxpayers without AFSs, the De Minimis Safe Harbor amount will be increased to $2,500, a significant change from the now applicable $500 threshold. It is important to note, however, that the threshold for taxpayers with AFSs will remain unchanged at $5,000. The increase in the safe harbor amount for taxpayers without AFSs could translate into substantial tax savings as taxpayers will be able to immediately expense up to $2,500 for a purchase, rather than having to spread this expense over an applicable depreciable life.

This increase officially becomes effective for tax years beginning on or after January 1, 2016. However, in Notice 2015-82, where the IRS laid out this increase, the IRS states they would not find any issue with an amount above $500 being used for tax years before January 1, 2016, as long as the amount used does not exceed the future $2,500 threshold. The increase in this safe harbor amount is definitely an important change for business owners to keep in mind as 2016 fast approaches. As always, if you have any questions, feel free to contact your WVC tax advisor.

By: Ruben Becerra, Staff Accountant

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