Have you bought anything for less than $2,500 this year?
If so, you may be able to deduct these items in one year, rather than depreciating them. As with many IRS regulations, it’s not quite this simple, but it’s very close.
This rule applies to all business connected or rental property items except your residence. They include, office equipment, computers, furniture, appliances, equipment, property improvements, fences, etc.
Under old IRS rules, you had to depreciate items that lasted longer than one year. For many years the IRS allowed Business and Real Estate Owners, under an unwritten rule, to deduct in the first year items that cost less than $200.
The $500/$2,500 Rule
When the new IRS rule was allowed in 2014, it said that Business and Real Estate Owners could also deduct in the first year items costing more than $200 and less than $500 if an Election was attached a statement to their tax return.
In late November of 2015 the IRS increased this $500 limit to $2,500!
Obviously, this makes many more business connected and rental property items purchased eligible to be deducted in the same year, rather than having to depreciate them. There is no limit as to how many items that can be deducted under this rule as long as each item costs less than $2500.
The $2,500 limit refers to individually invoiced items and includes any sales tax. For example, if you buy furniture and the receipt said, “Furniture — table and chairs $3,000” you would have to depreciate this under the normal rules of depreciation (7 years for furniture and appliances). But, if the receipt says, “Furniture – 1 table $1000 and four chairs at $500 each” you could deduct all of the furniture in the first year.
If the receipt said “Furniture – 1 table $2,600 and two chairs at $200 each”, you could deduct the chairs in the first year, but you would have to depreciate the table over 7 years.
Annual Tax Election Required
To use this rule you should attach an Election to your Individual , Partnership or Business tax return for the “Section 1 .263(a)-1(f) De Minimis Safe Harbor Election.”
We also recommend entering these expenses with “Other Expenses” on the tax return. Add up all the items to be deducted under this rule and put them on one line and call them “De minimis safe harbor expenses.”
This Election must be made each year you want to use this regulation. So, you need to attach the Election to your tax return for each subsequent year you purchase items costing more than $200 and less than $2,500.
Business and Real Estate Owners can start using this rule for 2016. However, the authors of the Treas. Regulation also said that if they also use it on 2015 tax returns and are audited, the IRS will not challenge deductions claimed.
If the item is purchased as part of a larger property improvement, it must be added to all the costs associated with the improvement and depreciated over 39 years. For example, if you bought a $400 bathroom sink as part of remodeling a bathroom, taxpayers have to depreciate it over either 27.5 or 39 years along with the rest of the cost of the remodeling. If only the sink was replaced, the taxpayer could deduct it in the first year.
We are always working to help our clients and friends to understand the new rules and make sense of the best way to apply these new rules to their business and rental property.
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