The Internal Revenue Service has increased the amount small businesses can expense versus depreciate on their taxes each year. It’s a change that should simplify record keeping and increase the amount of a capital investment you can write off in a year.
Specifically, the federal agency has boosted the so-called “IRS safe harbor” limit businesses can deduct on a capital investment within a single year from $500 to $2,500.
A capital investment is one used by a business to acquire, produce, or improve tangible property. It might range from investment in a new building to investment in a new piece of equipment or other new technology.
The IRS says the change is the result of feedback on a request put out to businesses asking for ways to make paperwork easier. The agency says it received more than 150 letters from businesses pointing out that a $500 threshold didn’t cover the cost of many expensed items such as tablet computers and machinery.
For example, purchasing tablets for $2,000 would have to be amortized for four years at $500 each year. Raising the IRS safe harbor threshold for capitalization from $500 to $2,500 would allow for the deduction to come in one year.
Safe Harbor is a term for an amount that the IRS won’t question. As a part of this new rule, the IRS has said it won’t question $2,500 deductions in years previous to the official 2016 start.
IRS Commissioner John Koskinen says in an agency announcement, “We received many thoughtful comments from taxpayers, their representatives and the professional tax community. This important step simplifies taxes for small businesses, easing the record keeping and paperwork burden on small business owners and their tax preparers.”
Capitalization has traditionally taken place over years as a deduction on the depreciation of property that’s intended to last years. But now businesses can deduct a larger expense for technology in a single year leaving depreciation for much bigger ticket items. The IRS safe harbor change affects businesses that do not maintain an applicable financial statement (audited financial statement).
And, as always, deductions can be taken on repair and maintenance costs which are not counted under the $2,500 limit. For taxpayers with an applicable financial statement, the small-dollar threshold remains $5,000.
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