IRS Raises Tangible Property Expensing Threshold From $500 to $2,500

Tax Law and News IRS and tax professionals

To the delight of small businesses and the accounting industry, the Internal Revenue Service has raised the tangible property expensing threshold from $500 to $2,500, starting in tax year 2016. However, the IRS will provide audit protection and not challenge the use of the new, elevated $2,500 threshold by eligible businesses in tax years before 2016.

By raising the safe harbor threshold for deducting certain capital items to $2,500, the IRS simplifies the paperwork and recordkeeping requirements for many small businesses. This change impacts small businesses that don’t maintain audited financial statements, and applies to amounts to acquire, produce and improve tangible property that would otherwise need to be capitalized or depreciated over a period of years. Such expenditures need to be substantiated by an invoice. This is a much-welcomed change, as the cost of many commonly expensed items, such as cell phones, tablets, and machinery and equipment, typically surpass the $500 level.

Just like before this most recent change, businesses can still claim otherwise deductible repair and maintenance costs, even above the $2,500 threshold. For businesses with audited financial statements, the de minimis or small dollar threshold remains at $5,000.

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