In what is most definitely good news for most small business owners, the IRS announced last month that they have raised the safe harbor threshold from $500 to $2,500 for deducting certain capital purchases. This means that purchases of items with a total price of $2,500 or less may be deducted as an expense on your tax return, rather than being treated as a capital expenditure and having to be depreciated over a period of several years.
The previous limit of $500 applied to most small businesses, while businesses that have an “applicable financial statement” (basically audited statements or a filing with the government) had a limit of $5,000. This original law went into effect in 2014, but had the effect of placing an unfair burden of additional paperwork and recordkeeping on smaller businesses. This is because audited financial statements are costly and are generally only done by larger or publicly traded companies.
The new increased limits apply only to those businesses that do not have audited financial statements, which effectively means most small businesses. For those business with an audited financial statement, the threshold remains at $5,000. The new limits go into effect for the tax year beginning January 1, 2016.
As with anything tax, the details can get complicated. Contact us for answers.