As most may know, the IRS does not have a materiality threshold when it comes to items on which they can enforce a ruling, but there are some ways to protect your company when the IRS comes calling for an audit. One of those is by establishing a capitalization policy for your company using the IRS de minimis safe harbor limits.
On September 17, 2013, the IRS issued final regulations under section 162(a) and 263(a) and established a de minimis safe harbor limit on tangible property of $500 per invoice item for all companies without a certified independent audit and $5,000 per invoice item for companies that obtain a certified independent audit. Recently, the IRS published Notice 2015-82 which increases the de minimis safe harbor limit on tangible property of $2,500 per invoice for all companies without a certified independent audit for years beginning January 1, 2016.
What does this mean for your company?
If a company has any tangible property purchases like computers, desks, or signs under $2,500, the company can expense the full amount of the purchase as a tax deduction. Further, since the notice is per asset, if 10 computers for $500 each are purchased, the full $5,000 amount could be expensed and deducted in a single year!
How can your company adopt and utilize the IRS de minimis rule?
The first thing a company needs to do is to formally adopt the IRS de minimis rule. Although it is not required it is a good suggestion to document and retain that policy adoption in company documents, effective the 1st of the year. LGT can provide a sample capitalization policy, customizable for each company.
However, a policy is only good when it is enforced. Once a company formally adopts the new policy, there can be no deviations from it. Doing so could negate the de minimis safe harbor limit. Also note, this is an annual election so it will need to be reaffirmed each year.
Finally, you might be worried about how your company can keep track of these purchased assets. We recommend those who want to keep track of purchases under the capitalization policy, like computers, furniture or others, enter the purchase into the fixed asset listing or software but assign the asset a $0 value. This enables them to keep a full listing of fixed assets when performing a fixed asset inventory while still conforming to the elected policy.
The services of a legal or tax advisor should be sought before implementing any ideas contained in this blog. To reach a financial advisor at Lane Gorman Trubitt, PLLC, call 214.871.7500 or email at email@example.com.