New $2,500 De Minimus Limit

[Jiggers]

The new De Minimis Safe Harbor Limit is raised to $2,500. For 2016, but the IRS says the taxpayers will have audit protection for 2015.

In examples given by The TaxBook, buying a computer for $2,400 that would normally be depreciated, you can now call this supplies and write it off.

Assuming the Section 179 remains at $25,000 for 2015, though passage of the extenders may increase this amount, what about breeding cows and bulls? A farmer buys 50 breeding cows at $2,000 each. Normally those are depreciated over 5 years. Does each cow, since each is under the $2,500 limit, qualify to be called "supplies"?

This is mute if the $25,000 limit is raised to $500,000 or something above the current $25,000.

Just doing some planning for my clients......

[Jiggers]

While visiting with a client and discussing this now, I wonder how reporting the sale of the breeding cow or bull would be handled. Currently a purchased cow or bull is reported on Form 4797.

Where would the sale be reported if these cows/bulls were expensed as "Supplies"?

On the Schedule F? Or on the Form 4797, and I would have to keep track of these cows and bulls like they were depreciated...... Geesh.

Oh, please, raise that Section 179 limit!

[kathyc2]

While visiting with a client and discussing this now, I wonder how reporting the sale of the breeding cow or bull would be handled. Currently a purchased cow or bull is reported on Form 4797.

Where would the sale be reported if these cows/bulls were expensed as "Supplies"?

On the Schedule F? Or on the Form 4797, and I would have to keep track of these cows and bulls like they were depreciated...... Geesh.

Oh, please, raise that Section 179 limit!

According to Forbes, a deal has been reached to make the enhanced 179 permanent and will be officially be voted on yet this week. Other "extenders" have also been made permanent and other will be extended at least through 2016. http://www.forbes.com/sites/anthonyn...tax-extenders/

[Burke]

Where would the sale be reported if these cows/bulls were expensed as "Supplies"?

I think it would be quite a stretch to call breeding cows and bulls "supplies." Just sayin.......

[Gretel]

What an interesting post. Going by common sense definition, neither bulls nor computers are supplies. If the tax code allows all invoice items under $2,500 to be deducted as expense (yes, per item as I understand it, meaning the whole batch can be written off), than it will be a nightmare keeping track of sales and determine what is "depreciation" recapture and what is gain. Logic tells me that the total proceeds now need to be reported on Schedule F but logic doesn't go far. I am sure we will hear some clarification soon.

[Jiggers]

Actually this situation could also cover all sorts of assets that should be depreciated, but with a cost of less than $2,500 they could be written off as supplies.

Great for Schedule E rentals because you can't use Sec 179 for rentals. Individual furniture and appliances may cost less than $2,500 and would qualify as supplies. Window air conditioners are less than $2,500 and could qualify for this. And water heaters, same logic. Correct?

[JohnH]

I'm still leaning in the direction of setting up a new account, possibly titled "Replacements", "Expendables", "Exhaustibles" or something along those lines. The word "Replacements" might be a little awkward the first year or two of operation of a new business, but after a few of these initial small-to-medium cost assets are upgraded, replaced, or discarded, the name is very descriptive. Might even have several of these, such as "Replacements-Office", "Replacements-Plant", "Replacements-Field" and so on. How far to drill down would depend upon the type & size of the business, as well as how frequently some of these items are purchased. For many businesses, I think this new rule will cover 80-90% of all office equipment assets.

Any item under $2,500 but having a significant useful life (something which might have been depreciated under the old rules) will wind up in that account.

[TAXNJ]

Curious

I'm still leaning in the direction of setting up a new account, possibly titled "Replacements", "Expendables", "Exhaustibles" or something along those lines. The word "Replacements" might be a little awkward the first year or two of operation of a new business, but after a few of these initial small-to-medium cost assets are upgraded, replaced, or discarded, the name is very descriptive. Might even have several of these, such as "Replacements-Office", "Replacements-Plant", "Replacements-Field" and so on. How far to drill down would depend upon the type & size of the business, as well as how frequently some of these items are purchased. For many businesses, I think this new rule will cover 80-90% of all office equipment assets.

Any item under $2,500 but having a significant useful life (something which might have been depreciated under the old rules) will wind up in that account.

Curious as to why you are doing that if it is expensed ? Also, will you separate each account by useful life and how will you handle the sale of the expense if later sold?

Thanks

[Burke]

Actually this situation could also cover all sorts of assets that should be depreciated, but with a cost of less than $2,500 they could be written off as supplies.

Great for Schedule E rentals because you can't use Sec 179 for rentals. Individual furniture and appliances may cost less than $2,500 and would qualify as supplies. Window air conditioners are less than $2,500 and could qualify for this. And water heaters, same logic. Correct?

That is how I am interpreting it and have already done it in 2014.

[Burke]

If the tax code allows all invoice items under $2,500 to be deducted as expense (yes, per item as I understand it, meaning the whole batch can be written off), than it will be a nightmare keeping track of sales and determine what is "depreciation" recapture and what is gain.

I am not sure that will be necessary. I hope not. If items are expensed, then, of course ANY proceeds received as a result of being sold would be 100% gain as basis would be zero. How often would that happen? Depends on what the item is, I guess.

[JohnH]

Curious as to why you are doing that if it is expensed ? Also, will you separate each account by useful life and how will you handle the sale of the expense if later sold?

Thanks

I'm thinking that with some clients (not all), simply expensing several $2,500 items might distort the figures for the underlying account. I wouldn't separate the accounts by useful life - the intent is simply to avoid the potential distortion in the underlying account. It's basically a client-specific decision based on facts & circumstances. If/when any expensed assets are sold, their basis is -0- and the gain would have to be reported.

There's also the issue about dealing with local county property tax assessors. Not everyone has that problem, but here in NC it can be a real pain. Anyone who has been through a couple of property tax audits in NC will probably back me up on that.

[BHoffman]

I'm thinking that with some clients (not all), simply expensing several $2,500 items might distort the figures for the underlying account. I wouldn't separate the accounts by useful life - the intent is simply to avoid the potential distortion in the underlying account. It's basically a client-specific decision based on facts & circumstances. If/when any expensed assets are sold, their basis is -0- and the gain would have to be reported.

There's also the issue about dealing with local property tax assessors. Not everyone has that problem, but here in NC it can be a real pain.

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?

[JohnH]

That has rolled around in the back of my mind as well. I suppose the answer depends upon how IRS implements this. Will it be an "all or nothing" election for all assets purchased in a given year, or can some assets in the $2,500 range be expensed while others are capitalized in the same year?

[Gretel]

That has rolled around in the back of my mind as well. I suppose the answer depends upon how IRS implements this. Will it be an "all or nothing" election for all assets purchased in a given year, or can some assets in the $2,500 range be expensed while others are capitalized in the same year?

I believe all that has changed is the $$. Meaning the election to expense can only be made if the is a company policy as to the $$ limit of expensing. I undestand this to be all or nothing since one will have to religiously follow ones own policies. I understand this does not need to be in writing in this case but I sure needs to be consistent.

[TAXNJ]

Important

I believe all that has changed is the $$. Meaning the election to expense can only be made if the is a company policy as to the $$ limit of expensing. I undestand this to be all or nothing since one will have to religiously follow ones own policies. I understand this does not need to be in writing in this case but I sure needs to be consistent.

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