In September 2013, the U.S. Internal Revenue Service (IRS) released final regulations regarding the deduction and capitalization of expenditures related to tangible property, also known as the final “repair” regulations. These final regulations are a guide with the application of sections 162(a) and 263(a) of the Internal Revenue Code on the amounts paid to acquire, produce, or improve tangible property, and also assist in differentiating between capital expenditure and deductible business expense. (For more details on these final regulations read: IRS Releases Final Regulations Governing Repairs and Capitalization of Tangible Property (effective January 1, 2014))
As per these regulations, a business owner could deduct up to $500 for each capital expense item as a tax deduction without the need to capitalize and depreciate them for tax purposes.
However, due to multiple requests made to the IRS to increase the existing $500 threshold, the IRS recognized that the limit was set too low to effectively reduce administrative burden on businesses. Many basic assets of businesses such as: smart phones, tablet-style computers, laptops often cost more than $500 and are quickly outdated. As a result, the IRS has finally increased the safe harbor threshold for deducting certain capital items from $500 to $2,500, for tax year 2016 and future tax years.
Here is a brief overview of the updated regulation for tangible property prepared by AG Tax professionals.
The Updated Regulation
In November 2015, the IRS announced that the safe harbor deduction limit for capital and repair expenses would be increased from $500 to $2,500. This change would be beneficial for business owners who do not maintain proper (audited) financial statements. Note that companies with applicable (audited) financial statements can still deduct costs of up to $5,000 per item.
The safe harbor deduction can be claimed on amounts spent to acquire, produce or improve tangible property that usually qualify as a capital item which would normally be capitalized and depreciated for tax purposes. In order to claim this $2,500 threshold, one simply needs an invoice for the claims allowing businesses without audited financial statements to immediately deduct many capital expenditures that would otherwise need to be claimed over several years.
Moreover, the IRS will provide audit protection to eligible businesses which used/use this new safe harbor threshold of $2,500 for tax returns filed after December 31, 2011 and before January 1st, 2016, by not challenging them in US tax courts.
AG Tax LLP Can Help
Tax situations can be complex and burdensome, if you have any tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canadian, and other international tax laws.
We can assist with:
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