Last tax season, tax practitioners got to experience TARS and its impact on the tax world. One of its best aspects is the de minimus safe harbor election. Under the de minimus safe harbor election, if a taxpayer has a business that does not have audited financial statements, they can expense $2,500 ($5,000 if they have audited financials) of items that were previously capitalized.
In order to do so, the taxpayer need only to consistently apply the a fixed asset expensing procedure throughout the year. For example, if the taxpayer has two new fixed assets worth $500 and $1,000, both must be expensed under their fixed asset procedures. If only one is expensed, the IRS can say that the safe harbor does not apply.
The safe harbor is great because the IRS will not challenge whether or not an asset needs to be expensed or capitalized.
The importance came up a little bit in Kilpatrick v. IRS. It should be noted, the tax years involved are 2009 and 2010, so the safe harbor would not have been available.
Kilpatrick (a CPA) had bought 2 oak armchairs, a desk, paintings, bowls, and a chandelier. Before even considering the business use of the assets, the court was able to deny Kilpatrick's deduction for these expenses because he just expensed the item without claiming IRC 179.
In the current tax would, if Kilpatrick would have included the safe harbor election, these expenses would not require the 179 election and would not be challenged by the IRS on whether or not they should be capitalized.
It is good practice now, to have all taxpayers make the election and for their accountants to properly use a fixed asset accounting procedure that complies with the safe harbor election.
Relevant Citations: Reg. 1.263A-1, TC Memo 2016-166
No comments:
Post a Comment