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Time to Change the De Minimis Amount for Tangible Property?

FeedbackSince the release of the final tangible property regulations, practitioners and taxpayers have shared numerous concerns about their complexity and administrative burden.  One of the most common complaints is the de minimis safe harbor election. 

The de minimis safe harbor provision, if elected, allows a taxpayer to immediately deduct amounts paid to acquire, produce or improve tangible property and gives the taxpayer additional protection from future Internal Revenue Service examination adjustments.  The safe harbor provision has two separate thresholds ($500 for taxpayers without an applicable financial statement and $5,000 for taxpayers with an AFS).  A certified audited financial statement is considered an AFS but reviewed or compiled financial statements are not.    

Back in my public accounting days, I remember $500 being a commonly used de minimis limit for many small businesses.  But why stop at $500?  The $500 threshold might have been reasonable 10-plus years ago but not in 2014.  So what is an appropriate amount that closely reflects the current environment of small businesses?

In a recent survey, members told us they think the $500 threshold is too low. More than half of the respondents thought the threshold should be between $1,000 and $2,000.  Almost 15% of the respondents preferred $5,000 or more and less than 10% of the respondents chose $1,000 or less.

Several CPAs suggested a single threshold for all taxpayers because not all businesses (especially large ones) have an audit; some taxpayers with audited financial statements have less gross revenue than those without.  Others suggested a range of thresholds based on the level of gross receipts. 

Moreover, many CPAs indicated that the $500 threshold does not represent the cost of ordinary repairs.  For example, an HVAC or commercial refrigerator related service call could cost $100 to $200 and replacement parts could add another $400 to $800.  Additionally, who fixes laptops and tablets?  Most new or used computers cost between $300 and $900 and it is cheaper to simply replace than fix.  Even electronic manufacturers would simply replace defects with a new unit instead of repairing them. 

Although the final regulations allow taxpayers to immediately deduct repair costs beyond the $500 threshold if both the definition of repair and the clear reflection of income standard are met, increasing the threshold would further reduce the administrative burden.  It is unfair for small businesses to apply the complex set of capitalization rules to costs that are truly repairs in nature.  Since the IRS has provided taxpayers a protection, it would be great if the IRS could make the rule more practical and give extra comfort to small businesses. 

Recently, the IRS and Treasury shared with the AICPA that they have received many questions on the de minimis safe harbor and that they would continue to monitor the implementation of the final regulations by taxpayers since these rules are less than a year old.  The AICPA is considering recommendations to the IRS to further reduce the administrative burden and increase the threshold amount for small business taxpayers. 

I’m curious to know what your recent repair experiences are and how much you spent.  What is the current threshold, if any, that you or your clients are using?  Based on that experience or that of your clients, what do you consider a reasonable threshold?  

Jason Cha, CPA, Technical Manager - Taxation, American Institute of CPAs. Jason serves as staff liaison to the Corporations and Shareholders Technical Resource Panel, as well as the Tax Methods and Periods Technical Resource Panel and related task forces.  Prior to joining the AICPA, Jason was a tax manager at KPMG LLP. His 14-plus years  of public accounting experience includes advising clients on tax issues affecting individuals, pass-through entities, and corporations. 

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