December 11, 2015
On November 24, 2015 the IRS announced an increase in an expensing provision available to businesses – from $500 to $2,500. This higher amount represents a threshold below which businesses may be able to write off capital expenditures. This is in addition to other provisions such as bonus depreciation and Section 179 expensing. According to the IRS, this increase will simplify paperwork and recordkeeping requirements.
Businesses are required to capitalize certain expenditures paid to acquire or produce a unit of property. Such costs are often referred to as fixed assets and are generally available for depreciation over a period of years.
The IRS issued final regulations in 2013 that substantially overhauled long-standing rules in this area. These regulations went into full effect in 2014 and were, in many respects, favorable for taxpayers. These regulations changed, among other things, whether or not certain expenditures should be capitalized or could be expensed.
As a matter of administrative convenience, these regulations included a safe harbor provision; a provision allowing businesses to use an accounting policy to expense small items costing up to $500 or even $5,000. The $5,000 threshold is available only to businesses with applicable financial statements (AFS). An AFS is a financial statement that is audited or that is required to be filed with the SEC or another federal or state government agency.
The lower threshold of $500 is available to businesses without an AFS. This is clearly the threshold applicable to the largest number of businesses, particularly small businesses.
As a result of pressure from taxpayers and various groups representing businesses, the IRS solicited public comment on the $500 threshold, asking whether or not it should be increased. As a result, this lower threshold was raised from $500 to $2,500. This represents a significant increase that positively affects countless businesses.
The increase is effective for costs incurred during tax years beginning on or after January 1, 2016. However, in another taxpayer-friendly gesture, the IRS indicated that use of the new threshold will not be challenged in tax years prior to 2016. This means that the higher threshold could be available for 2015.
There are certain criteria that need to be met in order to benefit from the capitalization threshold. Contact Johnson Price Sprinkle PA to consider the application of this enhanced deduction.
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About Johnson Price Sprinkle PA:
Johnson Price Sprinkle PA is a leading certified public accounting firm in Western North Carolina, providing innovative solutions created specifically for small to mid-sized businesses. With a sixty-year history, JPS has built its practice on providing superior accounting and exceptional service, in taxation, business advisory and assurance, to move clients forward by giving them the power of a national firm with the attention of a community-based one.