IRS responds to small business owners’ requests for higher capital expense deductions

Small business owners can now deduct more capital expenses, thanks to a new Internal Revenue Service decision to raise the tangible property expensing threshold.

The IRS raised the safe harbor threshold for deducing certain capital items for small businesses – those that do not require an audited financial statement – from $500 to $2,500.

The new $2,500 threshold applies to any item substantiated by an invoice. As a result, small businesses will be able to immediately deduct many expenditures that would otherwise need to be spread over a period of years through annual depreciation deductions.

The decision was made in reaction to numerous comments from small business owners. Responding to a February comment request, the IRS received more than 150 letters from businesses and their representatives suggesting an increase in the threshold. Commenters noted that the existing $500 threshold was too low to effectively reduce administrative burden on small business. Moreover, the cost of many commonly expensed items such as tablet-style personal computers, smart phones, and machinery and equipment parts typically surpass the $500 threshold.

As before, businesses can still claim otherwise deductible repair and maintenance costs, even if they exceed the $2,500 threshold.

The new $2,500 threshold takes effect starting with tax year 2016. In addition, the IRS will provide audit protection to eligible businesses by not challenging use of the new $2,500 threshold in tax years prior to 2016.

For taxpayers with an applicable financial statement, the de minimis or small-dollar threshold remains $5,000.