Batts Morrison Wales & Lee - News & Resources - Nonprofit Special Alert

IRS Raises Tangible Property Expensing De Minimis Safe Harbor Election Threshold for Certain Organizations with a Capitalization Policy – Update to Policy Must be Made Before January 1

As previously reported in our Special Alerts issued in December 2013 and in April 2015, the IRS and the U.S. Treasury issued final tangible property regulations (TPRs) that govern when taxpayers must capitalize and when they can deduct expenditures for acquiring, producing, or improving tangible property.  These regulations generally apply to business taxpayers (including exempt organizations with unrelated business income and taxable subsidiaries of exempt organizations) and have been fully effective since tax years that began on or after January 1, 2014.

The TPRs allow taxpayers meeting certain criteria to elect to expense the cost of acquiring tangible property with acquisition costs under a de minimis safe harbor amount.  If the election is made, taxpayers must also expense all materials and supplies with costs under the de minimis safe harbor amount (i.e., the taxpayer may not elect to capitalize materials and supplies costs).

To qualify for the safe harbor election, an organization must have a written accounting policy in place on the first day of the tax year calling for: (1) expensing amounts paid for property less than a specified amount, and/or (2) expensing payments for property with an economic life of 12 months or less.

For tax years that began on or after January 1, 2014, an organization with an “applicable financial statement” (which generally means an audited financial statement) could rely on the final regulations’ safe harbor to expense an item in accordance with the organization’s written capitalization policy utilized in preparing its financial statements, provided the amount paid for tangible property did not exceed $5,000 per item.  In addition, the safe harbor also applied to a financial accounting policy that expenses amounts paid for property with an economic useful life of 12 months or less, provided the costs didn’t exceed the $5,000 threshold.  There have been no changes to this threshold.

Additionally, for tax years that began on or after January 1, 2014, an organization that did not have an applicable financial statement but did have a written capitalization policy could rely on the de minimis safe harbor as long as the costs did not exceed $500 per item.  This threshold is applicable for the 2014 and 2015 tax years.  However, the IRS recently increased this threshold for 2016 as further described below.

For tax years beginning on or after January 1, 2016, the IRS has raised the safe harbor for an organization that does not have an applicable financial statement (which generally means an audited financial statement) but does have a written capitalization policy.  Organizations meeting these criteria may rely on the de minimis safe harbor as long as the costs do not exceed $2,500 per item.

In order to use the safe harbor election, organizations must have a written capitalization policy in place on the first day of the tax year for which the safe harbor election is being used.  Therefore, in order to take advantage of the increased safe harbor election threshold, organizations without an applicable financial statement must have a written capitalization policy in place on the first day of 2016.  The regulations do not require Board-level approval of the adoption of or changes to an organization’s written capitalization policy; therefore, organizations may follow their own internal policies with respect to proper approval of any accounting policy changes/adoptions necessary to address this new threshold.

Assuming the capitalization policy is properly in place by January 1, the safe harbor election is then made annually at the time the taxpayer files its tax return for the year.

Organizations that do not have a written capitalization policy in place may still deduct expenditures for tangible property costing $200 or less.

WHAT YOU MUST DO TO QUALIFY FOR THE SAFE HARBOR ELECTION

  BEFORE JANUARY 1:

  • If your organization currently has a written capitalization policy in place:
    • Review the policy to ensure that it calls for: (1) expensing amounts paid for property less than a specified amount, and (2) expensing payments for property with an economic life of 12 months or less.
    • Consider adopting a capitalization threshold that coincides with the de minimis thresholds contained in the new regulations (i.e., $5,000 for organizations with an applicable financial statement (i.e., generally an audited financial statement), or $2,500 for organizations without an applicable financial statement).  This will minimize any tax adjustments necessary when preparing the organization’s income tax return.
  • If your organization does not currently have a written capitalization policy, adopt a policy similar to the sample policy available here before January 1, 2016.

 WHEN YOUR TAX RETURN (FORM 1120 OR 990-T) IS FILED:

  • Notify your tax preparer that you wish to make the safe harbor election, and make sure your tax preparer attaches the necessary election to your tax return when it is filed.  (The election should be made annually for each year in which you wish to make the safe harbor election.)  (BMWL will attach the necessary election to the returns that we prepare for your organization.)