IRS increases capital expensing to $2,500

[Roland Slugg]

On November 24, 2015 the IRS announced that it is increasing the deduction threshold for equipment purchases by small businesses to $2,500, up from the previous level of $500. Here are relevant portions of the IRS's press release:

The Internal Revenue Service today simplified the paperwork and recordkeeping requirements for small businesses by raising from $500 to $2,500 the safe harbor threshold for deducting certain capital items.

The change affects businesses that do not maintain an applicable financial statement (audited financial statement). It applies to amounts spent to acquire, produce or improve tangible property that would normally qualify as a capital item.

The new $2,500 threshold applies to any such item substantiated by an invoice. As a result, small businesses will be able to immediately deduct many expenditures that would otherwise need to be spread over a period of years through annual depreciation deductions.

The new $2,500 threshold takes effect starting with tax year 2016. In addition, the IRS will provide audit protection to eligible businesses by not challenging use of the new $2,500 threshold in tax years prior to 2016.

For taxpayers with an applicable financial statement, the de minimis or small-dollar threshold remains $5,000.

The entire press release may be found on the IRS web site at IRS.gov.

[Gretel]

Thanks, Roland, great news.

[JohnH]

This is indeed great news. Sure will simplify the tax returns for several of my clients. I thought it always was a little silly to depreciate a $600 - $1,500 asset over 5-7 years anyhow. And Sec 179 was just another hoop to jump through in some cases. Glad they were generous by raising it to $2,5000.

I'm thinking of a new account to add to most clients' chart of accounts for this category of expense. Might need that to pull out figures used for local property taxes, for example. Anyone have thoughts on a descriptive name? The best thing I've come up with so far is "Replacements".

[Burke]

The best thing I've come up with so far is "Replacements".

I am thinking "Safe Harbor Capital Purchases," or "Capital Purchases <$,2500." Assume we will still have to use an election for this.......

[Maribeth]

Might not be the best description but we've been using "Supplies-de minimus"

[Lion]

I was using Small Equipment or something like that for a couple where we made the election. I like referring to the election in the title, though. Something like Safe Harbor Purchases as Burke mentioned.

Probably the election will be as we did for the $500, but haven't read the Notice yet.

[Gene V]

haven't read the Notice yet.

Here you go

https://www.irs.gov/pub/irs-drop/n-15-82.pdf

[TaxGuyBill]

Why would you have a separate account for it? Why not just include it with whatever other 'supplies' or category?

Creating a separate account could even make it questionable if it would qualify for the election. To qualify for the election, the taxpayer's "accounting procedures" needs to treat the item as a fully deductible expense. Creating a separate account just for items $200-$2500 could be viewed as not doing that. In my opinion, the "accounting procedures" should treat it as any other item, and not treat it differently.

[JohnH]

I'm just thinking over a few situations. An iPad at about $800 could probably just go into Office Expense. But a landscape contractor might purchase 3 or 4 mowers/ aerators/ tillers at $2,000 each in a given year. Not really materials, and a bit much for small tools.

I'm wondering if this will be a election or just normal procedure in the future. An if it is an election, seems like the decision to depreciate would be the election. So it would likely be an "opt out" rather than an "opt in".

[Maribeth]

Why would you have a separate account for it? Why not just include it with whatever other 'supplies' or category?

Creating a separate account could even make it questionable if it would qualify for the election. To qualify for the election, the taxpayer's "accounting procedures" needs to treat the item as a fully deductible expense. Creating a separate account just for items $200-$2500 could be viewed as not doing that. In my opinion, the "accounting procedures" should treat it as any other item, and not treat it differently.

This has more to do with tracking assets for personal property tax reasons, than for the feds. Unfortunately, the County does not agreed with the feds on what is an expense and what is a capital asset.

[TaxGuyBill]

This has more to do with tracking assets for personal property tax reasons, than for the feds. Unfortunately, the County does not agreed with the feds on what is an expense and what is a capital asset.

That makes sense. We don't have personal property tax here, so I forget that applies in other areas.

Thank you.

[JohnH]

Some of these local bureaucrats can get worked up over the cost of every office chair, as well as making sure you list the $100 worth of cleaning supplies in the storage room. It would be laughable if it weren't so petty and time consuming.

I mostly just throw in a SWAG on the property tax listing for the small stuff and call it a day. But I still need an account to track it, just in case a county auditor shows up to waste everybody's time for a half-day just so he can claim his travel reimbursement.