The Internal Revenue Service has announced they are simplifying paperwork and recordkeeping requirements for small businesses by raising the safe harbor threshold for deducting certain capital items from $500 to $2,500.
The $2,500 threshold applies to any item substantiated by an invoice, and includes amounts spent to acquire, produce, or improve tangible property that would typically qualify as a capital asset. As a result, businesses will immediately be able to deduct expenditures of $2,500 for an item of property.
As before, businesses can still claim otherwise deductible repair and maintenance costs, even if they exceed $2,500. Please also note that this change will not affect businesses that maintain applicable financial statements (audited financial statements). For those that have audited financial statements, the safe harbor remains at $5,000.
The change will officially take place for tax year 2016. However, the IRS is providing audit protection to eligible businesses by not challenging the use of the new $2,500 threshold in tax years prior to 2016.
For those that are wondering, this is not related in any way to the Tax Extender Bill that is currently in Congress. The increase in the safe harbor threshold was solely an IRS decision. We will be sure to update you as soon as there is news regarding any of the items from the Tax Extender Bill (especially if the Section 179 $500,000 expensing of tangible property rule gets reinstated to law).
If you have any questions or concerns regarding how the safe harbor threshold might affect you or your business, please contact us at your convenience.