IRS Raises Tangible Property Expensing Threshold to $2,500; Simplifies Small Business Filing and Recordkeeping

The Internal Revenue Service today simplified the paperwork and recordkeeping requirements for small businesses by raising from $500 to $2,500 the safe harbor threshold for deducting certain capital items.

The change affects businesses that do not maintain an applicable financial statement (audited financial statement). It applies to amounts spent to acquire, produce or improve tangible property that would normally qualify as a capital item.

The new $2,500 threshold applies to any such item substantiated by an invoice. As a result, small businesses will be able to immediately deduct many expenditures that would otherwise need to be spread over a period of years through annual depreciation deductions (or be used in the computation of the allowable Section 179 expense election).

As before, businesses can still claim otherwise deductible repair and maintenance costs, even if they exceed the $2,500 threshold.

The new $2,500 threshold takes effect starting with tax year 2016. In addition, the IRS will provide audit protection to eligible businesses by not challenging use of the new $2,500 threshold in tax years prior to 2016.

For taxpayers with an applicable financial statement, the de minimis or small-dollar threshold remains $5,000.

This change provides small businesses a real tax savings and potential simplification to their bookkeeping. The amounts expensed under this provision are not taken into account for purposes of computing the Section 179 expense election thus potentially significantly increasing the ability to expense depreciable property and equipment on a current basis. With the Section 179 limitation currently set at only $25,000, this may be very important to some taxpayers.