Be thankful for a recent IRS decision offering small business tax relief. In 2013, the IRS issued the massive final version of the repair regulations. These rules define when an expenditure is an improvement that must be capitalized and depreciated; expenditures outside of these definitions can be deducted as a repair.
The regulations contain an exception for small expenditures: the de minimis expensing safe harbor rule. Under this provision, an expenditure of $500 or less per invoice, or per item substantiated by the invoice, may be deducted. This safe harbor is elected by placing a statement within each year's tax return, if adopted for the year by the business. The de minimis deduction applies to both free standing asset purchases (e.g., small tools) and to small repair expenditures (e.g., motors, pumps, etc.).
The rules also allow a larger $5,000 per invoice or per item de minimis election, but only if the taxpayer has an Applicable Financial Statement or AFS. Most farms don't have an AFS, as this is defined as a financial statement required by the SEC, a certified audit, or a governmentally-mandated financial statement. Both the $500 and $5,000 de minimis expensing safe harbor elections require that the taxpayer treat these smaller expenditures as deductible for both financial statement and tax return purposes. Use of the de minimis safe harbor doesn't limit a taxpayer's ability to deduct what's otherwise an allowable repair, even though it exceeds the safe harbor amount.
NEW $2,500 SAFE-HARBOR AMOUNT
In a recent Notice 2015-82, the IRS has increased the lower tier safe harbor expensing limit from $500 to $2,500. This increased limit applies for those businesses without an AFS, and is effective for costs incurred in taxable years beginning on or after Jan. 1, 2016. As in the past, the taxpayer is to have an accounting policy in place (in practice, not in writing) as of the beginning of the year that treats these smaller expenditures, up to any amount of $2,500 or less per item on an invoice, as an immediate deduction for both internal books and tax return reporting.
HERE'S AN EXAMPLE
Smith Farms operates irrigated land. Smith decides to upgrade its irrigation systems by acquiring higher capacity deep well pumps with solar electric capability. The invoice reads: 4 deep well/solar-supplement pump systems at $2,200 each = $8,800. Assuming Smith Farms has adopted a safe harbor de minimis expensing policy to deduct items of $2,500 or less for the year, this invoice may be treated as an immediate deduction. Smith must treat this invoice as a deduction for both its internal books and in any financial statements, as well as for tax reporting purposes. Smith doesn't need to consume any of its Section 179 first year deduction limit for this acquisition.
The take-away: Farm businesses interested in using this increased expensing limit should assure that their books and records throughout 2016 consistently deduct small asset and small improvement expenditures (in any selected amount up to $2,500). That ensures there's consistency between book and tax reporting for the year.
Editor's Note: Andy Biebl is a CPA and tax principal with the firm of CliftonLarsonAllen LLP in Minneapolis with more than 40 years experience in ag taxation, including as a trainer for the American Institute of CPAs and other technical seminars. He writes a monthly column for our sister magazine, The Progressive Farmer. To pose questions for future tax columns, e-mail AskAndy@dtn.com.
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