New $2,500 De Minimus Limit

[JohnH]

Yes, a very important issue.
Much is riding on how this is implemented by IRS.
If the decision isn't allowed on a year-by-year basis, the utility of this election goes way down insofar as tax planning is concerned.

[Burke]

It is my understanding that it is a year-by-year election. And note that the Election Statement does not break down this item or that item, but applies to any that come under that IRC section if so elected.

[Jiggers]

It is my understanding that it is a year-by-year election. And note that the Election Statement does not break down this item or that item, but applies to any that come under that IRC section if so elected.

Interesting. So if my farmer client makes the election to be $2500, then all items that cost $2500 or less must be expensed as supplies. He can't say that his breeding cows are not supplies and depreciate them as he normally would and that $2300 welder is a supply and expensed. No picking and choosing.

[Lion]

Is it each depreciation class? Can we use it for 7-year furniture but not for 5 year computers?

[TaxGuyBill]

Is it each depreciation class? Can we use it for 7-year furniture but not for 5 year computers?

Nope. It's all or nothing.

§1.263(a)-1(f): "a taxpayer electing to apply the de minimis safe harbor ... may not capitalize ... any amount paid in the taxable year for tangible property if the amount specified ... meets the requirements ... of this section"

http://www.ecfr.gov/cgi-bin/text-idx?SID=77a267196ae3bbb96bb8b0da6619124d&node=se26.3.1_1263_2a_3_61&rgn=div8

[TAXNJ]

Agree

Interesting. So if my farmer client makes the election to be $2500, then all items that cost $2500 or less must be expensed as supplies. He can't say that his breeding cows are not supplies and depreciate them as he normally would and that $2300 welder is a supply and expensed. No picking and choosing.

Seem to agree with you. If cow is under $2.5k is it considered a supply. If you have an ice cream machine that produces ice cream cones and can be considered a supply. Worth researching.

[kathyc2]

Wouldn't the expensing as supplies make unavailable LTCG treatment in the future? Say you buy the bull for 2,500 this year and expense it, but in a few years you sell it for 3,500. Seems to me that if you expense it as supplies the 3,500 would all be ordinary income, but if you 179 it then 1,000 would get LTCG treatment.

[TaxGuyBill]

Wouldn't the expensing as supplies make unavailable LTCG treatment in the future? Say you buy the bull for 2,500 this year and expense it, but in a few years you sell it for 3,500. Seems to me that if you expense it as supplies the 3,500 would all be ordinary income, but if you 179 it then 1,000 would get LTCG treatment.

Wow, I didn't think of that. I keep going back and forth, but as of now, I don't think that is the case.

Correct me if I'm wrong, but I think selling business property is a 1231 gain. This is the definition under 1231:

"The term “property used in the trade or business” means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 1 year, and real property used in the trade or business, held for more than 1 year, which is not ...


I'm focusing on the words "of a character". The "character" of livestock (or whatever else) would be subject to §167, even if it is not depreciated under §167 because of the 'de minimis' election.


What do you think???

[Jiggers]

I think this is a time that we need to have a serious talk with clients that this may effect. I was concerned that the $25,000 Sec 179 limit was not going to be raised. However, it has.

So that concern is mute.

If the $2500 amount is elected, and the cow costing $2300 is expensed is supplies on his Schedule F, when it is sold gives me a problem. Is the income to be reported on Schedule F, subject to self-employment tax? Or on Form 4797 as usual?

When the cow is on the depreciation schedule, recordkeeping is easy. Expensed as supplies requires some additional recordkeeping not in the software.

Maybe an election to expense something less than $2500 is in order.

[TAXNJ]

Would

I think this is a time that we need to have a serious talk with clients that this may effect. I was concerned that the $25,000 Sec 179 limit was not going to be raised. However, it has.

So that concern is mute.

If the $2500 amount is elected, and the cow costing $2300 is expensed is supplies on his Schedule F, when it is sold gives me a problem. Is the income to be reported on Schedule F, subject to self-employment tax? Or on Form 4797 as usual?

When the cow is on the depreciation schedule, recordkeeping is easy. Expensed as supplies requires some additional recordkeeping not in the software.

Maybe an election to expense something less than $2500 is in order.

Would think you can still track the items whether you place them in an asset or expense account. Your software should allow you to create sub accounts of the main account with specific identifier for each item. Should be easy to do whether one uses software or ledger sheets.

[Snaggletooth]

Good observation Beth

Is there anything in the new rules that prohibit capitalizing? Maybe if expensing certain items is going to distort the account, then why not just capitalize it and ignore the election?

I believe this point is overlooked by clients who want to max out their expenses every year with no emphasis on tax planning. Typically a first year business reports a loss, which offers the client much less than would be the case than if the expenses had been deferred to a profitable year.

S. 179 is not available to create a loss (although it can be carried forward). But this new $2500 election can be used to circumvent this and create a loss that helps the client very little in comparison.

[Burke]

Is it each depreciation class? Can we use it for 7-year furniture but not for 5 year computers?

Last year, if I am not mistaken, those classes could be elected individually for Bonus Depreciation. I guess that is still around.

[Burke]

Interesting. So if my farmer client makes the election to be $2500, then all items that cost $2500 or less must be expensed as supplies. He can't say that his breeding cows are not supplies and depreciate them as he normally would and that $2300 welder is a supply and expensed. No picking and choosing.

Livestock is unique in how they are treated under the tax code. Check out the MSSP for General Livestock. They mention a lot of sections but 1.263(a) is not among them.
Hope this comes up on various boards and maybe even cause some type of clarification from the IRS or even a CCA.

[TaxGuyBill]

See comment below.

[TaxGuyBill]

Livestock is unique in how they are treated under the tax code. Check out the MSSP for General Livestock. They mention a lot of sections but 1.263(a) is not among them.
Hope this comes up on various boards and maybe even cause some type of clarification from the IRS or even a CCA.

You are right, livestock are not "supplies" which are defined at §1.162-3(c), but they are still "tangible property". If you elect the 'de minimis' election, you "may not capitalize ... any amount paid in the taxable year for the acquisition or production of a unit of tangible property" unless it is included in inventory or is a spare or rotable part.