Great news! The IRS has finally heard the cry of many taxpayers and CPAs regarding the ability to expense minor purchases of supplies & equipment. As part of the tangible repair regulations made mandatory beginning with tax years beginning on or after January 1, 2014, the IRS included a De Minimis Safe Harbor. This safe harbor allows taxpayers to expense purchases under the threshold amount set by the IRS (previously $500 for taxpayers without audited financial statements). This meant that any item purchased at or below this threshold did not have to be capitalized.
Many professionals have advocated for a higher threshold to be more in line with the reality of business expenses, noting that most computers, ipads, phones, etc. cost more than $500. Due to the push back, the IRS has increased this threshold to $2,500 for tax years beginning on or after January 1, 2016. The $5,000 threshold for taxpayers with audited financials has remained unchanged. While there is no specific requirement that the policy be in writing, it is still a good practice to have a written policy. Expensing policies of $2,500 (or whatever amount is reasonable for your business) needs to be in place before the end of the year.
It’s important to note that this “safe harbor” is elective, meaning you are not required to expense everything under $2,500. It simply means that if you make the election, as long as your capitalization policy is at $2,500 or less, the IRS will not question it. Additionally, if your policy is greater than $2,500, it does not necessarily mean that you are at risk. This simply means that you will need to justify the policy in the event that you are examined by the IRS.