Tangible Property Limit Increased for Those Without an AFS

Modern concept of ownershipIn late November, the IRS released and update to the deductible amount of tangible property purchases for taxpayers without an applicable financial statement (AFS). The amount was recently approved and raised from $500 to $2,500 per item. This change is effective January 6, 2016.

What is tangible property?

According to Wikipedia, tangible property is “literally, anything which can be touched, and includes both real property and personal property (or moveable property).”

That means as a business owner, it includes real products, such as furniture, office equipment, small office fixtures, light trucks, buses, and more. It also includes personal items, like jewelry, toys, and sports equipment.

According to Investopedia, both property forms may be depreciated over a five- or seven-year period using straight-line amortization. But, items may also be eligible for accelerated depreciation.

Does the increase apply to you?

The IRS states that this rule applies not only to business owners within corporations, S corporations, partnerships, and LLCs, but also applies to individuals filing tax Form 1040 with a Schedule C, E, or F.

Further it applies to you if you have incurred costs to acquire, produce, or improve tangible real or personal property to carry out your business or trade.

What is the de minimis safe harbor election?

If you meet certain requirements, you are not required to capitalize on the amount paid for a unit of tangible property.

To qualify, you must have had an accounting policy in place at the beginning of the taxable year. The policy should be written and be provided in an audit. Within the policy, it must note items that cost less than a specific dollar amount to be expensed. It should also identify paid property that has an economic useful life of twelve months or less to be expensed.

Finally, the accounting treatment for those expenses must be consistent for both book and tax purposes, and could not exceed more than $500. That number, however, was recently raised to $2,500 per item.

These rules apply to you if you do not have an AFS; so, it does apply for reviews, compilations, and tax returns.

How does this change affect deductions you normally take?

A valid election for expenditures of less than $500 may be expensed and are not subject to IRS scrutiny in an audit. However, if you did not have a valid accounting policy in place by January 1, 2015, your election will be invalid; thus, subject to IRS scrutiny. Effective January 6, 2016, the burden of proof, in the case of an audit, is on you to provide that the items greater than $2,500 are eligible to be expensed.

How We Can Help

Lang Allan & Company can provide you with guidance to help you take full advantage of the depreciation deductions available for the 2015 tax year.

Please contact us if you have questions regarding the di minimis safe harbor election.

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