Increase in Safe Harbor Expense Threshold Creates Opportunity for Small and Medium-Sized Businesses

With the release of Notice 2015-82, the IRS has provided a valuable end of year tax-planning tool to businesses looking to expense tangible property purchases.

The tangible property regulations have been in effect since January 1, 2014. The regulations included a safe harbor under which businesses may expense, rather than capitalize, certain tangible property. One such example would be the cost associated with computers and other technological hardware, but would not include any software or other intangible expenses. The safe harbor is intended to both ease taxpayer compliance and reduce a business’s administrative burden.

Notice 2015-82 raises the safe harbor from $500 per invoice (or per itemized item on an invoice) to $2,500. The change is effective beginning January 1, 2016, but the IRS has built-in audit protection features to the increased threshold so long as the remaining tangible property regulations are met, effectively making the increase available to businesses as they close out their 2015 tax year.

The threshold increase is likely to have the most impact on small and medium-sized businesses because a $5,000 threshold is already in place for those businesses possessing an Applicable Financial Statement (i.e., an SEC or regulatory filing, certified audited financial statement or a financial statement required to be provided to a federal or state government or agency). While the safe harbor election is subject to certain limitations such as the anti-abuse rule, the increase in threshold from $500 to $2,500 is a valuable tax planning tool available to businesses in 2015 and in future years.