written by Jay Logal
In 2014, the IRS wrote final regulations that, among other things, defined what capital expenditures are. As part of these regulations, the IRS also provided for a De Minimis Safe Harbor. For tax years beginning in 2014 and 2015, the safe harbor amounts are $5,000 provided the taxpayer has applicable financial statements or $500 without applicable financial statements. (Applicable financial statements generally require audited financial statements.)
For tax years beginning in 2016, the $500 safe harbor amount is raised to $2,500. The IRS’s reasoning for increasing the safe harbor amount is in response to comments that the lower limitation did not effectively reduce the administrative burden of capitalizing many commonly purchased items. Additionally, the $500 safe harbor was at odds with the accounting policies of many small businesses. These small businesses often deduct amounts in excess of $500 due to immateriality.
To qualify to use the safe harbor amount, taxpayers with applicable financial statements are required to have a written policy in place. Taxpayers without applicable financial statements are not required to have a written policy, but we at the Whitlock Company strongly recommend having such a policy.
The safe harbor amount is applied at the invoice level or per item as substantiated by the invoice. This cost must include delivery fees, installation services, or similar costs. There is no limit to a dollar amount that taxpayers can write-off in a tax year.
If the taxpayer elects to use the safe harbor rules, the taxpayer must apply these rules to all purchases made during the year. The regulations do not allow the taxpayer to pick and choose which items purchased will apply to the safe harbor. This could be an issue for taxpayers who need to consider loss carryforward items.
The safe harbor cannot be applied to items subject to code section 263A. Additionally, property purchased to be included in inventory are exempt from the safe harbor rules. Amounts paid for land are exempt as well.
Making the safe harbor election is very easy; determining whether or not this is the most tax advantageous tax position is not. Loss carryforward items set to expire could be lost due to this easy election. This election is just one of many examples in the tax code that appear easy on the surface, but can often result in additional tax burdens if your unique tax situations and positions are not considered.
Contact The Whitlock Company at 417-881-0145 if you have any questions regarding the effect that making the safe harbor election will have on you or if you need assistance in drafting a safe harbor policy. We have extensive experience helping taxpayers make these types of decisions.