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IRS Increases TPR Benefit for Taxpayers

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The IRS has provided some good news for small business owners! In a Notice and accompanying news release, the IRS has announced an increase, from $500 to $2,500, to the de minimis safe harbor (DMSH) limit for capitalization of fixed assets and deductions for materials and supplies for taxpayers that don’t maintain an applicable financial statement (AFS). An AFS is a financial statement that is audited, or a financial statement that is reviewed or compiled and provided to a federal, state, or local government body other than the IRS or SEC. This change will simplify the paperwork and recordkeeping requirements for small business and other taxpayers.

This change is effective for tax years beginning on or after January 1, 2016. This increase is effective for costs incurred during tax years beginning on or after Jan. 1, 2016, but use of the new threshold won’t be challenged in tax years prior to 2016. For the 2015 year, the capitalization threshold should be discussed with your tax advisor.

The $2,500 DMSH applies to an amount paid during the tax year to acquire or produce a unit of property (UOP), or acquire a material or supply, only if:

  • The taxpayer has, at the beginning of the tax year, accounting procedures treated as an expense for non-tax purposes amounts paid for property (1) costing less than a specified dollar amount; or (2) with an economic useful life of 12 months or less;
  • The taxpayer treats the amount paid for the property as an expense on its books and records; and
  • The amount paid for the property does not exceed $2,500 per invoice (or per item as substantiated by the invoice).

The DMSH is an administrative convenience from the IRS to permit taxpayers to deduct smaller expenditures for the acquisition or production of property, or for the improvement of existing property, which otherwise would have to be capitalized. It does not limit a taxpayer’s ability to deduct otherwise deductible repair or maintenance costs that exceed the DMSH. A taxpayer may continue to deduct all otherwise deductible repair or maintenance costs, regardless of amounts-but the DMSH establishes a minimum threshold below which all qualifying amounts are considered deductible.

Please contact a Berntson Porter advisor at 425.454.7990 with any questions on this matter.


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