The tangible property regulations, first effective in 2014, provide a de minimis capitalization safe harbor election that is available for capital expenditures, materials, supplies, repair items, and property with an economic useful life of 12 months or less. Taxpayers annually elect to use the safe harbor by filing an election statement with their timely filed income tax return. In order to take advantage of the election, taxpayers must have written accounting procedures treating these items as deductible for book purposes by the first day of the tax year in which the safe harbor is elected. Groups of companies filing combined or consolidated financial statements may use one written policy for the entire group.
Taxpayers that elect to use the de minimis safe harbor may deduct up to $5,000 per item or invoice for amounts deducted for book purposes provided they have applicable financial statements.
Applicable financial statements include:
- Audited financial statements filed with the Securities and Exchange Commission (SEC)
- Audited financial statements accompanied by a report of an independent CPA
- Financial statements that are required to be provided to the federal or state government or any federal or state agencies (other than the SEC or IRS)
The regulations previously limited taxpayers without applicable financial statements to a $500, not $5,000, threshold. IRS Notice 2015-82 increases the threshold for taxpayers without applicable financial statements from $500 to $2,500 for tax years beginning on or after Jan. 1, 2016. Although the guidance isn’t effective until the 2016 tax year, the IRS indicated in the notice that the issue will not be raised on examination or further pursued for examinations already in progress if taxpayers otherwise follow the guidance in the notice.
Taxpayers using the de minimis safe harbor should remember that to be effective the election must be made each year with a timely filed tax return.