How to maximize deductions with 2016 TPR changes and what to do now

Gregory S. Flannigan, CPA
Partner, Tax

The TPRs continue to evolve. Recently IRS released Notice 2015-82 increasing the de minimis safe harbor (DMSH) amount for non AFS (applicable financial statement) taxpayers for taxable years beginning on or after January 1, 2016 to $2,500 from the prior $500 amount.

The other significant or important statements in the Notice 2015-82 are the following:

  • The de minimis safe harbor does not limit a taxpayer’s ability to deduct otherwise deductible repair or maintenance costs that exceed the amount subject to the safe harbor. The safe harbor merely establishes a minimum threshold below which all qualifying amounts are considered deductible.
  • Having considered taxpayers’ comments, the goal of the final tangible property regulations to reduce administrative burden, and the concern that taxpayers’ methods of accounting clearly reflect income, the § 1.263(a)-1(f)(1)(ii)(D) de minimis safe harbor limitation for a taxpayer without an AFS is increased from $500 to $2,500.
  • For taxable years beginning before January 1, 2016, the IRS will not raise upon examination the issue of whether a taxpayer without an AFS can utilize the de minimis safe harbor provided in § 1.263(a)-1(f)(1)(ii) for an amount not to exceed $2,500 per invoice (or per item as substantiated by invoice) if the taxpayer otherwise satisfies the requirements of § 1.263(a)-1(f)(1)(ii).

Our thoughts or points on the new DMSH amount are the following:

  • Taxpayers should note that in order for them to be able to employ the new DMSH $2,500 amount, they have to “change” their DMSH amount before January 1, 2016. Taxpayers are able to change their DSMH amount by just “putting in place” what their new DMSH amount is. Recall that non-AFS taxpayers just need to determine and establish their DMSH amount before the beginning of their new tax year; it does not need to be written; it does not have to be communicated.
  • While a non-AFS taxpayer does not have to communicate nor have a written DMSH policy, we strongly recommend that the taxpayer modifies its DMSH amount to match the new safe harbor of $2,500 in writing.
  • Note that the new DMSH amount does not affect what the taxpayer’s DMSH amount was for tax year 2015 as that amount should have been established before January 1, 2015. In other words, if a taxpayer had, for example, a $1,000 and under capitalization policy for 2015, that amount is not affected by this new Notice and cannot now be increased to $2,500.
  • The words of the Notice 2015-82 and the new $2,500 DMSH amount support the idea that taxpayer’s should establish a DMSH amount that is not based on what the IRS sets as the DMSH amount, but is based upon what is reasonable for the taxpayer.
  • Final note – the AFS amount of $5,000 was not increased or changed by the IRS.

If you have any questions, please feel free to contact Greg Flannigan at 612-381-8755 or gflannigan@luriellp.com.

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