Accounting Policy Recommended for Business Owners to allow for new safe harbor increase of expenses
New considerations for business owners.
Has your bookkeeper or CPA talked to you about the need to have an Accounting Policy regarding the expensing or capitalization of costs for your business? You may not think this would apply to you because you only have rental real estate or a small business, but the IRS regulations are impacting all business operations and causing a headache for everyone.
There is a safe harbor election allowing you to expense property purchases under $2500 (it was just increased from $500 in November 2015, see below) but the election can’t be made unless the business has an Accounting Policy in place at the beginning of the year. Small entities don’t need a written policy but my CPA peers are recommending their clients put one in place so there is never a question about your ability to elect the safe harbor and thus be able to expense rather than capitalize items up to $2500.
Please check into this with your CPA.
Here’s some sample wording you can use for your Accounting Policy:
This accounting policy establishes the minimum cost that shall be used to determine the capital assets to be recorded in ____________________ ‘s books and records. Property purchased below this minimum will be treated as an expense in the current year.
Capital Asset Definition and Threshold:
A “capital asset” is a unit of property with a useful life exceeding one year and a per-unit acquisition cost exceeding $2,500. Capital assets will be capitalized and depreciated over their useful lives. __________________________ will expense the full acquisition cost of tangible personal property below these thresholds in the year purchased.
All capital assets are recorded at historical cost as of the date acquired.
Property acquired for amounts below $2,500 are recorded as an expense for _________________________ books and financial statements. In addition, assets with a useful life of 12 months or less must be expensed.
Invoices substantiating the acquisition cost of each unit of property will be retained for a minimum of 10 years.
Announcement from November of this year:
The IRS announced on Tuesday that it will raise the deductible amount for purchases of tangible property by taxpayers without applicable financial statements (AFSs) to $2,500 per item, an increase from $500 (Notice 2015-82). The IRS made the change after receiving more than 150 comments recommending that the limit on deductions for purchases of tangible property be raised to anywhere between $750 and $100,000.
Under the tangible property regulations, to reduce the compliance burden on taxpayers, taxpayers can elect to currently deduct expenses for the purchase of tangible property that would otherwise have to be capitalized. For taxpayers without AFSs, that election was limited to $500 per invoice or per item. (For taxpayers with AFSs, the limit is $5,000, which the IRS justifies as warranted because those taxpayers are more likely to follow GAAP rules.) After the regulations were issued, many practitioners objected to the $500 de minimis amount, pointing out, among other things, that a typical computer or smartphone usually costs more than $500.
The AICPA advocated for raising the de minimis threshold to $2,500, sending a letter on Oct. 8, 2014, to the IRS urging the increase. In that letter, the AICPA argued that the $500 threshold was too low to do much to reduce the burden of complying with the complex capitalization rules. The AICPA also noted that the safe harbor effectively imposes a clear reflection of income test on small businesses for expenses over the then-$500 threshold, while larger businesses, with AFSs, are subject to that test at a higher ($5,000) threshold, imposing a burden on small businesses that is not imposed on larger businesses that purchase items that are the same or similar in nature.
The new de minimis amount applies to costs for tax years beginning on or after Jan. 1, 2016, but the IRS will not raise the issue of a higher amount during an audit for earlier tax years and will not further pursue the issue for any tax year beginning after Dec. 31, 2011, and ending before Jan. 1, 2016, for any case pending in IRS examination, Appeals, or the Tax Court.