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IRS Raises Tangible Property Expensing Threshold to $2,500; Simplifies 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.

“We received many thoughtful comments from taxpayers, their representatives and the professional tax community, said IRS Commissioner John Koskinen. “This important step simplifies taxes for small businesses, easing the recordkeeping and paperwork burden on small business owners and their tax preparers.“

Responding to a February comment request, the IRS received more than 150 letters from businesses and their representatives suggesting an increase in the threshold. Commenters noted that the existing $500 threshold was too low to effectively reduce administrative burden on small business. Moreover, the cost of many commonly expensed items such as tablet-style personal computers, smart phones, and machinery and equipment parts typically surpass the $500 threshold.

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.

Capitalization regs’ de minimis safe harbor for taxpayers with no AFS raised to $2,500

In a Notice and accompanying news release, IRS has announced an increase, from $500 to $2,500, in the de minimis safe harbor limit for taxpayers that don’t maintain an applicable financial statement (AFS). According to IRS, this change will simply the paperwork and recordkeeping requirements for small business and other taxpayers.

Background. The final tangible property regs issued in 2013 generally provide that, unless rules allowing the deduction of certain materials and supplies apply, a taxpayer must capitalize amounts paid to acquire or produce a unit of property (UOP), whether real or personal property, including leasehold improvement property, land and land improvements, buildings, machinery and equipment, and furniture and fixtures.

As an alternative to the general capitalization rule, the final regs permit businesses to elect to expense their outlays for “de minimis” business expenses. If the taxpayer is eligible for the de minimis safe harbor election, and chooses it, an amount paid to acquire or produce any eligible UOP (or any eligible material or supply) is deducted under Code Sec. 162 in the year paid or incurred.

The de minimis safe harbor applies to an amount paid during the tax year to acquire or produce a UOP, or acquire a material or supply, only if:

  1. The taxpayer has, at the beginning of the tax year, written accounting procedures treating as an expense for non-tax purposes amounts paid for property (1) costing less than a specified dollar amount; or (2) with an economic useful life of 12 months or less;
  2. The taxpayer treats the amount paid for the property as an expense on its AFS (such as a financial statement required to be filed with the Securities and Exchange Commission, or a certified audited financial statement accompanied by an independent CPA’s report and used for credit or reporting purposes) if it has one – or on its books and records if it does not – in accordance with its accounting procedures; and
  3. If the taxpayer has an AFS, the amount paid for the property does not exceed $5,000 per invoice (or per item as substantiated by the invoice), or if the taxpayer does not have an AFS, does not exceed $500 per invoice (or per item as substantiated by the invoice), or other amount as identified in published IRS guidance.

The de minimis safe harbor was intended as an administrative convenience to permit a taxpayer to deduct small dollar expenditures for the acquisition or production of new property, or for the improvement of existing property, which otherwise must be capitalized under Code Sec. 263(a). It does not limit a taxpayer’s ability to deduct otherwise deductible repair or maintenance costs that exceed the amount subject to the safe harbor—a taxpayer may continue to deduct all otherwise deductible repair or maintenance costs, regardless of amounts—but merely establishes a minimum threshold below which all qualifying amounts are considered deductible.

Comments received. After issuing the final tangible property regs, and in response to a formal request for comments on whether the limit should be raised for taxpayers without an AFS, IRS received numerous requests for the limit to be raised with suggested amounts ranging from $750 to $100,000. The general sentiment was that the $500 limit was too low to effectively reduce the administrative burden of complying with the capitalization requirement for small business taxpayers that frequently purchase tangible property in their trades and businesses. Specifically, many commonly expensed items like tablets and smart phones individually exceed the $500 threshold. Commenters also expressed concern about the disparate treatment of taxpayers with an without an AFS under the safe harbor ($5,000 vs. $500), noting that obtaining an AFS is cost-prohibitive for many small businesses and doesn’t adequately justify the significantly lower limit.

Threshold raised. In light of comments received and the goal of reducing administrative burdens, IRS has increased the Reg. § 1.263(a)-1(f)(1)(ii)(D) de minimis safe harbor limitation for a taxpayer without an AFS from $500 to $2,500. (The limit for taxpayers with an AFS remains at $5,000.)

Effective date/audit protection. This increase is effective for costs incurred during tax years beginning on or after Jan. 1, 2016, but use of the new threshold won’t be challenged in tax years prior to 2016. And, if a taxpayer’s use of the de minimis safe harbor is an issue under consideration in examination, appeals, or before the U.S. Tax Court in a tax year beginning after Dec. 31, 2011 and ending before Jan. 1, 2016, and the issue relates to the qualification under the safe harbor of an amount that doesn’t exceed $2,500 per invoice (or item, as substantiated by invoice) and the taxpayer otherwise satisfies the applicable requirements, IRS won’t pursue the issue further.

HLB International Appoints New Member in Mongolia

HLB International, one of the leading global accountancy networks with presence in 130 countries, has recently signed a new member in Mongolia – HLB Mongolia Audit LLC.

Established in 2010 and based in Ulaanbaatar, the capital city of Mongolia, HLB Mongolia Audit LLC provides audit, accounting and tax services.

HLB Mongolia’s Managing Partner Enkhtuya Chultemdorj commented “we are looking forward to working with HLB and its member firms. It will help us focus on mapping out the future for our business and financial needs, keeping our eyes firmly on the road ahead and assisting local and international clients achieve their targets.”

Strategically located and rich in resources, Mongolia is an important market for HLB’s network, particularly in relation to ties with the Australian economic and mining sectors as well as having strong ties with Russia. HLB Mongolia Audit LLC is a valuable addition to the HLB network.

HLB International Appoints New Member in Gabon

HLB International, one of the leading global accountancy networks with presence in 130 countries, has recently signed a new member in Gabon – Premus Conseils.

Established in 2010 and based in Libreville, the capital and largest city of Gabon, Premus Conseils provides audit, accounting, corporate finance and tax services to a variety of clients including in oil & gas, mining, forestry, agriculture and construction as well as international financial institutions.

Gabon is an oil rich country where Chinese investment is big. This makes Premus Conseils a valuable addition to the HLB network.

Year-End Estate Tax Planning

In 2015, the federal estate tax exemption is $5.43 million. With little planning, a married couple can pass up to $10.86 million worth of assets to heirs, so no estate tax will go to the IRS. Those numbers will increase in the future with inflation.

With such a large exemption, you may think that estate tax planning is unnecessary. However, nearly half of all states have an estate tax (paid by the decedent’s estate) or an inheritance tax (paid by the heirs) or both. The tax rate goes up to 16% in many states, or even higher in some.

What’s more, state estate tax exemptions tend to be lower than the federal exemption; in some states, there is virtually no exemption for certain estates. Therefore, you may find year-end estate tax planning to be worthwhile, even if you don’t anticipate having an estate over $5 million or $10 million.

Employing the exclusion

In terms of year-end planning, anyone with estate tax planning concerns (federal or state) should consider year-end gifts that use the annual gift tax exclusion, which is $14,000 in 2015. That is, you can give up to $14,000 worth of assets to any number of recipients, with no tax consequences. You don’t even have to file a gift tax return.

Married couples can give up to $28,000 per recipient, from a joint account, or $14,000 apiece from individual holdings. Larger gifts probably won’t be taxed because of a generous lifetime gift tax exemption, but you’ll be required to file a gift tax return and there could be future tax consequences.

Example: Walt and Vera Thomas have two children. In 2015, Walt can give $14,000 worth of assets to their son Rick and $14,000 to their daughter Ava. Vera can do the same, moving a total of $56,000 from their taxable estate.

Similar gifts might be made to parents you’re helping to support. As explained previously in this issue, giving appreciated stocks and stock funds to loved ones may be an effective way to reduce exposure to any market retreat.

Whatever your purpose, keep in mind that there is no spillover from one year to the next. If you miss making $14,000 annual exclusion gifts in 2015, you can’t double up with a $28,000 exclusion gift in 2016. Moreover, make sure that gifts are completed—checks must be cashed—by December 31. Therefore, you should put your plans for year-end gifts in motion well before year end.

Year-End Business Tax Planning

As usual, the Section 179 “expensing” deduction is set for a drastic reduction. And, as usual, business owners probably can make year-end plans for equipment purchases with the expectation that a higher deduction amount for 2015 will be enacted.

Typically, purchases of business equipment are depreciated over several years, so the amount you spend can be deducted gradually from business income. However, the tax code allows some purchases to be deducted in full right away.

Example: Brett Benson spends $20,000 on equipment for his manufacturing company this year. Brett can expense (deduct) that $20,000 to get an immediate tax benefit, rather than spread the tax savings over several years. Generally, an immediate tax savings is more valuable than a future tax savings.

By the numbers

For the expensing deduction, two numbers are critical. One is the maximum amount you’re allowed to deduct. The other is the phaseout amount: the amount of equipment you can purchase before losing the expensing benefit. The phaseout provision essentially restricts this tax break to small and mid-sized companies because giant firms buy so much equipment that they lose the ability to expense any equipment outlays.

The tax code currently calls for the expensing deduction to be capped at $25,000, with a dollar-for-dollar phaseout beginning at $200,000. Thus, if your company buys $210,000 worth of equipment, the excess $10,000 reduces the expensing limit from $25,000 to $15,000.

In truth, those $25,000 and $200,000 numbers are not realistic today. Congress has repeatedly passed tax laws with higher limits: In recent years, expensing up to $500,000 worth of equipment has been permitted, with a phaseout starting at $2 million of annual purchases. All signs point to a repeat performance for 2015. Both Houses of Congress already have indicated willingness to extend some expired tax breaks, including the $500,000 and $2 million limits for expensing business purchases.

Therefore, you should go ahead with purchases of equipment that truly will help your company become more productive, even if this year’s total tops $25,000. New and used equipment will qualify. Make sure to have equipment placed in service by year end, in order to get a deduction for 2015.

Similarly, the “bonus depreciation” tax break has expired but likely will be restored for 2015, judging by Congressional activity. Under this provision, which applies only to new equipment, purchasers can take a 50% first year depreciation deduction, followed by depreciating the balance of the purchase price over several years. Both expensing and bonus depreciation tax breaks reduce the cost of capital and increase cash flow for small companies, so you should consider their impact when planning equipment purchases.

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