This new tax promise ought to help float your boat, if you are running a small business!
The Internal Revenue Service just made a 5-fold increase in the property expenses that business taxpayers can deduct against their income. The agency now has enlarged its “safe harbor” amount to $2,500 per item (or invoice), meaning small businesses can count on the IRS accepting that level of deduction without challenge.
The rule gives more direction in handling minor purchases of property used by small businesses in their work. For example, tools such as smart phones, tablet computers and even parts for office equipment, are considered tangible property and, according to tax codes, they had to be depreciated over their lifetimes instead of being written off right away.
Even the IRS thought that level of detail was burdensome. So, for tax year 2014, the agency opened a safe harbor– one source calls it a “loophole” – for property expenses of $500 or less. In short, the feds promised to treat them like ordinary business costs and not to quibble over deductions taken in the same tax year,
Well, that promise, which the IRS calls a “de minimus safe harbor,” now will float larger boatloads of expenses. Beginning Jan. 1, the IRS raised the amount to $2,500 per purchase from the prior $500. “De minimus” is a Latin term translating to “negligible” or “trivial” and it seems $500 was too small to ease the recordkeeping burden for many businesses. (For the full rationale, look at IRS Notice 2015-82.)
To get that favorable treatment, the biz taxpayer must claim it explicitly on its tax return every year. As you might guess, there also are some accounting details, including reliable records of those safe harbor expenses.
But don’t make this a knee-jerk practice. The expanded safe harbor may or may not fit well into the big picture for tax planning. For example, in years of large losses, a business taxpayer may not want to invoke the IRS “de minimus” rule, Eric notes. Those small purchases of tangible business property might create a bigger tax benefit over the next 2 to 5 years if they are depreciated instead of being written off in one year, he says. Your accountant should be willing to run some scenarios and investigate the possibilities,
At the same time, for many small businesses, it’s clear the new safe harbor will ease recordkeeping and deliver quicker returns in tax deductions.
We at EricJohn Ltd. can help small businesses choose and use the larger safe harbor!