IRS Raises Safe Harbor Threshold and Simplifies Recordkeeping for Small Businesses to Deduct Certain Expenditures

The Internal Revenue Service (IRS) announced on November 24, 2015 that it has raised the safe harbor threshold for small businesses to deduct certain capital expenditures from $500 to $2,500. The $2,500 threshold applies to small businesses that do not have audited financial statements.  For larger businesses with audited financial statements, the safe harbor threshold remains at $5,000.

The safe harbor provision allows a business to deduct the entire expense on the current year’s tax return instead of claiming partial deductions for depreciation spread out over multiple tax years. The provision applies to amounts spent to acquire, produce, or improve tangible property that would normally qualify as a capital item. The taxpayer will need to keep records of their invoices (accounts payable) to substantiate the deductions.

The new regulation takes effect for tax year 2016.

References

IRS Press Release IR-2015-133

IRS Notice 2015-82

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