IRS Opens the Floodgates for Capitalize vs. Expense
The Tom and Jerry Cartoon, At Long Last, Gets a New Story Line
Small Business Gets a Windfall for the Ages
The issue is as old as the hills in the federal tax law. At least more than a hundred years old and that’s longer than most of us have been around. Old as old can be, and yet the latest version of the issue packs about as much sizzle and punch as you can get. Step right up and get your tickets here. Wait, you don’t have to buy a ticket from anyone. You can put on your own show right here, right now and, for that matter, most anytime you like.
What are we talking about? Most taxpayers want to write off expenditures right now. On this year’s tax return. IRS wants to slow tax writeoffs down – to deny a current deduction and make the taxpayer delay by forcing the spread of deductions over time. It’s like a Tom and Jerry cartoon. It’s one of the oldest shows on the books. And, it’s the same story over and over and over and over.
That’s what makes IRS’ latest move in the saga so surprising. It’s like now the scriptwriter lets the cat blow the mouse to smithereens over and over and over and over. The cat finally outsmarts the mouse, or something like that. And, it is the mouse who authored it all.
Late in 2015, IRS penned a new rule, a loophole of sorts, for small business. And, if you know what you’re doing, you can drive trucks through it. Some assembly is required and it is helpful to read the instruction manual. After that, it’s easy if you keep your books and records properly.
Small expenditures for business are not worth capitalizing on the books. Write it off right now and let’s move along down the road. At some “low” level of spending, IRS has to agree. The question is, what is the dollar threshold, below which expenditures should just get expensed?
Many of us, at least once in our careers, back in the day, encountered the proverbial IRS agent who wants us to capitalize the $225 HP financial calculator and depreciate it over five years. Most IRS agents, thankfully, let that one go.
IRS, in its apparent desire to stabilize (and standardize) this domain, in its all-new Tangible Property Regulations (finalized effective for 2014), brought to us the so-called “de minimus” safe harbor. If its conditions are met, a taxpayer can expense items below a certain dollar threshold.
For small businesses (those with no audited financial statements, SEC filings or other government non-tax financial report filing duty), IRS initially set the de minimus dollar threshold at $500 per expenditure. The AICPA and other taxpayer advocates continuously barked about such a low benchmark and their nipping finally hit pay dirt.
So, what is the big change? Effective for 2016 and later, IRS upped the $500 de minimus threshold to $2,500. For small business, writing everything (except for inventory and a few other exceptions) off which costs less than $2,500 is now fair game if the taxpayer structures and operates correctly. That’s right, $2,500 a pop, regardless of whether it makes common sense or not.
Let’s take, for example, a hot dog vendor who sells his poison dogs down across from the ballpark. Most everything a hot dog vendor buys equipment-wise, except for the truck and trailer he uses to haul his cart around, will cost less than $2,500. If he has his tax and accounting protocol set up and operating right, he can currently write off most all his expenditures currently.
What does it take to do it right? First, he must have a “de minimus” policy in place (preferably in writing) declaring his de minimus expensing standard to be (up to) $2,500. Second, he must keep a set of financial books (good luck with that for the hot dog vendor). Third, the treatment of these expenditures must be consistent on his tax return (let’s hope the hot dog vendor has a tax return) and on his books. Fourth, on his tax return, he must annually make the “de minimus” safe harbor election.
A lot of things must go right, especially for a hot dog vendor (and many a small business for that matter), but if all of the above does go correctly, a taxpayer can currently, without quarrel from IRS, write off a whole lot of things right now.
The $2,500 threshold could go even higher for a small taxpayer in certain “facts and circumstances” contexts. But, to go higher than $2,500, the taxpayer would have to qualify for it and everything would have to be done right.
Not that you would always want to go higher than $500 (or $2,500) (or higher). For some taxpayers in some situations, it may not be best, for a variety of reasons, to “write the hell off” out of everything right now. At the same time, IRS has indeed handed us, regardless of materiality, a pretty cool new toy. If it’s best for you, you can put the peddle to the middle and let it roar.
This all, of course, must fit properly into a much larger piece known as IRS’ (relatively new) Tangible Property Regulations, but that’s another story. Until next time, for now (no pun intended), currently deduct things responsibly.
Copyright © 2016 Bradley Burnett