IRS Announcement Means Great News For Your Clients Who Do Not Have an Applicable Financial Statement
The de minimis safe harbor is an elective provision that establishes a threshold below which all qualifying amounts are considered deductible. This provision is intended as an administrative convenience allowing taxpayers to deduct amounts paid for the acquisition or production of new property, or the improvement of existing property that would otherwise be subject to capitalization.
On Nov. 24, the IRS announced an increase in the dollar threshold from $500 to $2,500 for taxpayers who do not have an Applicable Financial Statement (“AFS”). An AFS includes certified audited financial statements. (See IRS Notice 2015-82.) This increase in the dollar threshold is effective for costs incurred during taxable years beginning on or after January 1, 2016.
3 steps CPAs should take with clients who do not have an AFS as a result of this change:
- Contact clients before the beginning of the 2016 taxable year.
A taxpayer electing to apply the de minimis safe harbor may expense amounts paid for the acquisition or production of tangible property that are expensed for book purposes in accordance with accounting procedures in place as of the beginning of the taxable year. Under this election, the taxpayer may not capitalize any amount paid for the acquisition or production of a unit of tangible property nor treat as a material or supply. However, IRC Section 263A may require the capitalization of direct and allocable indirect costs of property produced by the taxpayer.
For taxable years beginning on or after January 1, 2016, amounts expensed for book purposes that do not exceed $2,500 per invoice, or per item as substantiated by the invoice, may be expensed for tax purposes under the de minimis safe harbor election.
Determine whether your clients’ book procedures for expensing tangible property should be changed before the beginning of the 2016 taxable year. Although not required, a written policy provides the best documentation in the event of an IRS examination.
- Instruct your clients to obtain itemized invoices from vendors and to have transaction costs invoiced separately.
The dollar threshold is applied on a per item basis when substantiated by the invoice. Therefore, instruct your clients to obtain invoices that substantiate the cost per item.
Transaction costs are excluded from the per item cost when invoiced separately. Therefore, instruct your clients to have transaction costs such as delivery fees and installation charges billed separately.
- Make your clients aware of prior year audit protection.
Your clients may have adopted accounting procedures in prior years that exceeded the $500 de minimis threshold. Previously, the amounts expensed in excess of $500 were subject to IRS examination. However, Notice 2015-82 states that the IRS will no longer examine amounts expensed in prior years that do not exceed $2,500 per invoice (or per item as substantiated by invoice) when the amount was expensed in accordance with accounting procedures in place as of the beginning of the taxable year.
Get your clients and prospects the information they need to reduce their tax burden. If you have questions or want to partner with qualified experts, contact us.