New $2,500 De Minimus Limit

[Gretel]

Important point when you say "Meaning the election to expense can only be made if the is a company policy as to the $$ limit of expensing". Will you give the reference that states "can only be made if the is a company policy as to the $$ limit of expensing".

Thanks

Here is what Reg.1.263(a)-1(f) said for the $500 limit in 2014: Taxpayers without an applicable financial statement, but with accounting procedures in place at the beginning of the year specifying how to treat certain expenses for non-tax purposes, may elect to apply the de minimis safe harbor to amounts paid for property that does not exceed $500 per invoice.

I interpret this procedure as either having a written policy or following certain accounting procedures (oral plan) for all of the year in question. I believe I made a mistake how this limit applies since it says "per invoice", not per invoice item. I vaguely remember that this can be circumvented by getting several invoices. However, this has limits f.e. with building projects.

[Gretel]

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.

I was pondering how easy it is to do client a disservice with creating losses in expensing items under $2,500. With a Sec. 179 election a loss won't be created and the carry forward deduction will also be subject to reduced SE tax. However, if just expensed and a NOL is created, than the deduction for SE tax is lost forever.

[Gretel]

Here is what Reg.1.263(a)-1(f) said for the $500 limit in 2014: Taxpayers without an applicable financial statement, but with accounting procedures in place at the beginning of the year specifying how to treat certain expenses for non-tax purposes, may elect to apply the de minimis safe harbor to amounts paid for property that does not exceed $500 per invoice.

I interpret this procedure as either having a written policy or following certain accounting procedures (oral plan) for all of the year in question. I believe I made a mistake how this limit applies since it says "per invoice", not per invoice item. I vaguely remember that this can be circumvented by getting several invoices. However, this has limits f.e. with building projects.

As far as each invoice item goes I believe it goes by UOP and it seem to be right what I said in my first post. This UOP issue is what hinders someone with a building process to go for several trip to the hardware store for the same project. I certainly will need to brush up on this whole repair reg issue. In my materials from last year I also found the statement that an item treated as expenses will remove it from Cap.Gain treatment, which makes sense. There was no reference.

[TaxGuyBill]

With a Sec. 179 election a loss won't be created

Not necessarily. If Section 179 is used on Schedule C or F and there are also W-2 wages, the 'excess' Section 179 would offset the W-2 wages (so Schedule C or F would show a loss, but not save any additional SE tax).

[Gretel]

Not necessarily. If Section 179 is used on Schedule C or F and there are also W-2 wages, the 'excess' Section 179 would offset the W-2 wages (so Schedule C or F would show a loss, but not save any additional SE tax).

That's true but at least the business schedule creates a warning while there is no warning if assets are expensed under supplies.

[taxea]

I read it to mean it is to be used for materials, supplies and equipment,, not for inventory that is intended to be sold to others.

[TXEA]

Jiggers - your quote Re: This is mute if the $25,000 limit is raised to $500,000 or something above the current $25,000.

It is not necessarily moot since if you elect the de minimis limit for other materials and supplies then assuming breeding herd qualify, then they would have to be included in the election (i.e., I don't think you can pick and choose what items to include in the election. I think it is all or none.

The reason this matters is depreciated breeding herd is sold without self employment tax on Form 4797. If we expense the breeding herd, then the sale would be reported on Schedule F and subject to SE tax.

[Jiggers]

Jiggers - your quote Re: This is mute if the $25,000 limit is raised to $500,000 or something above the current $25,000.

It is not necessarily moot since if you elect the de minimis limit for other materials and supplies then assuming breeding herd qualify, then they would have to be included in the election (i.e., I don't think you can pick and choose what items to include in the election. I think it is all or none.

The reason this matters is depreciated breeding herd is sold without self employment tax on Form 4797. If we expense the breeding herd, then the sale would be reported on Schedule F and subject to SE tax.

Yes, that is my understanding of the $2500 supplies. What I was doing was tax planning for a large rancher with the Section 179 remaining at $25,000.

I have advised him this morning that the $2500 is probably too high. We are evaluating his "supplies" and will probably settle on somewhere in the $1500 - $1800 range.

[TAX4US]

Now that I am really confused after reading all this and several other sites. Is the $2500 deductibility an all or nothing deal. In other words can I dep some items and expense other items? one that comes to mind in our area is a bull costing $2500 and a stock cow costing $2500. Farmer usually sells bulls after 3 years but holds stock cows 7 to 10 years. or if he buys rake for $2500. Are we then saying TP cannot use dep on these items BUT must either use expense on all or capitalize on all. I see a bookkeeping nightmare about to happen. Using Sec 179 could help this problem but farmer does not need the loss that may occur as tp is trying to build up ss amounts. All thoughts appreciated.

Could the same be said if TP bought clunker truck for $2500. Uses rule get rid of and in further years use a mileage deduction. TP's will try anything now. We have a state that uses depreciation work sheets to calculate Personal Property Tax. If not on these sheets County/towns can see them and thus less tax. How would we handle that? Dual depreciation sheets possibility. Enough Rants. Will read on.

[Gretel]

Whatever limit (up to $2,500) a taxpayer decides in the beginning of the tax to use for assets to be expensed will apply to all such items. Depreciation classes have no bearing on this descision. Since bonus is still around issues can be mitigated with not expensing anything over a certain $$ amount and then dealing with bonus and Sec. 179. The bad part is that a taxpayer has to set this limit for expensing assets in the beginning of a tax year.

[taxea]

Rather than all the speculation how about reading the regs..one of which excludes inventory assets from DeMinimus use...i.e livestock intended for sale

[TAXNJ]

Clarify

Rather than all the speculation how about reading the regs..one of which excludes inventory assets from DeMinimus use...i.e livestock intended for sale

You are saying the regs. you mention is for 2016 in addition for 2015 and no change except for the $ increase. Correct?

[TaxGuyBill]

The bad part is that a taxpayer has to set this limit for expensing assets in the beginning of a tax year.

Just to clarify: They need to set the dollar amount for their NON-TAX accounting procedures at the beginning of the year. If they don't want to expense that much on their tax return, the taxpayer will not make the 'de minimis' election for that year and use Section 179 instead on whichever assets they choose.

[taxea]

You are saying the regs. you mention is for 2016 in addition for 2015 and no change except for the $ increase. Correct?

I am saying read the most current regs.

[TXEA]

Rather than all the speculation how about reading the regs..one of which excludes inventory assets from DeMinimus use...i.e livestock intended for sale

The original question referenced livestock held for breeding purposes. There is theoretically no difference in breeding cattle and a computer. Both are Sec 1245 assets. The sale of each are reported on Form 4797.

Livestock held for sale are purchased cattle NOT held for breeding purposes. The sale of which is reported on Schedule F.