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IRS Revises Safe Harbor Capitalization Policy Regulations

$2,500 expense threshold for most businesses.


In late 2013, the IRS finalized a long term project to rewrite regulations as they relate to the capitalization of units of property. The new regulations provided a standard, albeit detailed, process for taxpayers to follow in determining whether an item should be capitalized. To help alleviate some of the accounting burden on taxpayers, the IRS created a “safe harbor” rule whereby taxpayers can expense items that cost less than a given amount.

This first version of IRS regulations allowed taxpayers to establish “safe harbor” capitalization policies which expense fixed asset purchases that cost less than a given threshold. For taxpayers with an Applicable Financial Statement (AFS) the threshold was $5,000 for all other taxpayers the threshold was $500. Generally speaking, an AFS is a financial statement that is submitted to the SEC or other government agency, or an independently audited financial statement.

New Regulations

In Notice 2015-82, the IRS increased the threshold for taxpayers without an AFS from $500 to $2,500. There has been no change to taxpayers with an AFS. This threshold is effective for costs incurred during tax years beginning on or after 1/1/2016.

“Effective” until 12/31/15
Applicable Financial Statement (AFS)—$5,000
No AFS—$500

“Effective” starting 1/1/16
Applicable Financial Statement (AFS)—$5,000
No AFS—$2,500

Additionally, the use of the new threshold will not be challenged by the IRS in tax years prior to 2016. Furthermore, if a taxpayer’s use of one of the safe harbor thresholds is an issue in an audit for a tax year beginning after 12/31/11 ending before 1/1/16, the IRS will not contest the issue if the $5,000/$2,500 threshold was followed. Meaning a taxpayer who used a threshold of less than $2,500 for 2014/2015 has been granted audit protection, as long as the other requirements of the policy have been met.

Potential Pitfalls

As before, the Regulations still allow the IRS to come to an agreement with a taxpayer if a higher threshold is used. However it remains unclear as to what happens if the taxpayer chooses a number lower than their threshold for all, or some property. Given that the purpose of the “safe harbor” was to reduce accounting burden on taxpayers, the use of a lower threshold on some property has the potential to cause issue under IRS audit.

Furthermore, the “safe harbor” generally requires that the same threshold be used for both book and tax purposes. A higher threshold, while good for reducing current year tax expense, may have inadvertent negative effects on a taxpayer’s GAAP financial statements.

Please call us if we can assist you in planning for this revision.