In Notice 2015-82 the IRS has increased the invoice cost limits for taxpayers without an applicable financial statement to $2,500 for the de minimis safe harbor under the tangible property regulations that took effect for tax years beginning in 2014.
Under Reg. §1.263(a)-1(f) a taxpayer may annually elect to apply the de minimis provisions that, effectively, “bless” a taxpayer’s capitalization policy up to certain limits on a per invoice level.
The requirements to qualify for the election and the amount of the safe harbor amount both vary depending on whether or not a taxpayer has an applicable financial statement (AFS).
A taxpayer that issues one of the following has an applicable financial statement:
Applicable financial statements are:
- A statement filed with the Securities and Exchange Commission;
- A statement audited by an independent CPA that is used for credit purposes, reporting to equity holders or for any substantial non-tax purpose or
- A statement other than a tax return required to be provided to an agency of the federal or a state government (other than the IRS or the SEC)
If the taxpayer has more than one such statement, then the first listed above will count as the taxpayer’s applicable financial statement.
If the taxpayer has none of those financial statements, then the taxpayer does not have an AFS. Under the regulations such a taxpayer has to meet the following requirements to elect the de minimis method to allow for writing off of amounts below the invoice amounts applicable to taxpayers without an AFS:
The taxpayer must have in place accounting procedures as of the first day of the tax year that define the items that will not be capitalized on the taxpayer’s books and records
The items must actually not be capitalized on the taxpayer’s books and records, but rather reflected as an expense.
If the taxpayer meets the above criteria, the taxpayer must attach an election to its tax return for each year it wishes to make use of the safe harbor protection.
Under the original regulations the invoice amount allowed to be written off with safe harbor protection for taxpayers without an AFS was $500. Effective for tax years beginning on or after January 1, 2016 that amount will increase to $2,500.
As well, the notice provides that the IRS will not challenge taxpayers who meet all of the other requirements who write off items up to $2,500 in earlier years.
Observation: This relief may not be helpful if a taxpayer had tailored its procedures to the old $500 limit. While the old rule did not require using $500 as the maximum limit on the procedures, rather just granting no automatic protection on exam to any items in excess of that amount, some taxpayers nevertheless adopted policies that tied directly to the $500 limit. If a taxpayer has such a policy in place currently the taxpayer will not be able to take advantage of the higher limit until it first changes its policy and second begins a new tax year.
No change was made to the provisions applicable to taxpayers with an AFS. The invoice cost limit in such cases is $5,000 (not $2,500). As well, such taxpayers have to meet the following requirements to make the election:
The taxpayer must have written accounting policies in place as of the beginning of the tax year outlining items that are and are not to be capitalized
Any item for which the taxpayer is seeking the safe harbor protection for expensing on the tax return must also be reflected as an expense on the applicable financial statement.
In all cases the fact that an items costs more than the invoice cost limit does not mean it must be capitalized for federal tax purposes. As the preamble to the final regulations note, in what can best be read as instructions to agents not to “go overboard” on the issue, the IRS National Office noted:
Finally, for both taxpayers with applicable financial statements and taxpayers without applicable financial statements, the de minimis safe harbor is not intended to prevent a taxpayer from reaching an agreement with its IRS examining agents that, as an administrative matter, based on risk analysis or materiality, the IRS examining agents will not review certain items. It is not intended that examining agents must now revise their materiality thresholds in accordance with the de minimis safe harbor limitations provided in the final regulation. Thus, if examining agents and a taxpayer agree that certain amounts in excess of the de minimis safe harbor limitations are not material or otherwise should not be subject to review, that agreement should be respected, notwithstanding the requirements of the de minimis safe harbor. However, a taxpayer that seeks a deduction for amounts in excess of the amount allowed by the safe harbor has the burden of showing that such treatment clearly reflects income.