Posted December 15, 2015 at 04:09 PM


The Treasury Department and the IRS have increased the de minimis safe harbor limit included in the 2013 tangible asset repair regulations (T.D. 9636) to $2,500 for taxpayers without an applicable financial statement (AFS).

The increase comes after the IRS and Treasury formally requested comments in March of 2015 regarding a threshold increase for taxpayers without an AFS.

The safe harbor limit was originally intended to reduce the paperwork and recordkeeping burden on businesses by permitting an election to allow certain amounts spent to acquire, produce or improve tangible property that would normally qualify as a capital item to be deducted rather than capitalized. Businesses without an AFS were permitted to expense up to $500 per item or invoice, and businesses with an AFS were allowed up to $5,000 per item or invoice.

The IRS received more than 150 comment letters regarding the $500 safe harbor limit for taxpayers without an AFS. Many commenters noted that few items costing $500 or less have a useful life of more than 1 year. It was also noted that the cost of many frequently expensed items such as smart phones, tablet-style personal computers, and machinery and equipment parts typically exceed the $500 threshold.

Some taxpayers and professionals viewed the large disparity between the thresholds permitted for taxpayers with an AFS versus taxpayers without an AFS as discriminatory. For many small businesses, obtaining a financial statement that meets the AFS requirements is cost prohibitive. Taxpayers with an AFS could purchase the same or similar items without being subject to the compliance burden placed on smaller businesses without an AFS.

In explaining its rationale for keeping a larger safe harbor limit for taxpayers with an AFS, the IRS stated that an AFS provides independent assurance that taxpayer policies are consistent with GAAP and do not materially distort financial statement income.

The new $2,500 threshold takes effect starting with tax year 2016.

In addition, the IRS announced audit protection to eligible businesses related to the de minimis safe harbor, as long as its other requirements are met. For taxable years prior to January 1, 2016, IRS will not challenge correct usage of the new $2,500 threshold. Additionally, the IRS will not pursue a taxpayer’s use of the safe harbor in an examination, appeal, or in the U.S. Tax Court for taxable years between December 31, 2011 and January 1, 2016.

The IRS reminded taxpayers that as before, they may continue to deduct all otherwise deductible repair or maintenance costs, regardless of amount.

Further details on this change can be found in Notice 2015-82.