IRS Raises Tangible Property Expensing Threshold to $2,500

Published on: 16:23PM Nov 25, 2015

Today, in Notice 2015-82, the IRS raised the de minimis safe harbor threshold for deducting certain capital items from $500 to $2,500. This applies to amounts spent to acquire, produce or improve tangible property that would normally qualify as a capital item for businesses without an applicable financial statement (audited financial statement). Keep in mind, though, this is only a safe harbor related to purchases of capital items and businesses can still claim otherwise deductible repair and maintenance costs, even if they exceed the $2,500 threshold.

The threshold applies to any item substantiated by an invoice and is applicable for tax years beginning in 2016. However, 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 at $5,000.

As an example, under the old rule, Farmer Johnson could elect to expense any capital item costing less than $500.  Under the new rule, Farmer Johnson can elect to expense any capital item costing less than $2,500 per item (not total invoice).  This election is made on the tax return and is an annual election. 

With this change and the expected increase of Section 179 to $500,000, most capital assets purchased by most farmers should be deductible in the year of purchase.  Especially with lower crop prices, it may be a few years before farmers start spending more than $500,000 on capital assets.