IRS Increases De Minimis Safe Harbor Threshold

The IRS issued Notice 2015-82 on November 24, 2015, stating that taxpayers without an applicable financial statement can elect to deduct purchases of tangible property up to $2,500 as a current expense.  The previous threshold amount issued with the tangible property regulations on August 14, 2014 was $500.  The threshold amount is applied per invoice or per item as substantiated by the invoice.  The election is made annually on a timely filed tax return (including extensions).

Since the final regulations were issued, the $500 threshold amount has come under scrutiny for being too low compared to the $5,000 threshold for taxpayers with an applicable financial statement (generally an audited financial statement). The AICPA has been a strong advocate to raise the de minimis amount to $2,500 issuing a comment letter to the IRS on October 8, 2014.  The AICPA argued that the $500 threshold was not providing much help to taxpayers trying to comply with the administrative burden of the complex tangible property regulations.  Taxpayers currently are permitted to deduct amounts in excess of the $500 de minimis threshold, but they have the burden of proof of establishing that the deduction is a clear reflection of income. The burden of proof can be subjective and difficult to apply and is an interpretation of facts and circumstances.  Raising the threshold amount reduces reliance on the reflection of income test and brings the amount more in line with many taxpayer capitalization policies.

The new de minimis amount applies to tax years beginning on or after January 1, 2016. However, the IRS stated in Notice 2015-82 that it will not raise the issue of deducting a higher amount for tax years beginning before January 1, 2016 during an audit examination or for any case under appeals or before the Tax Court.

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