Tax Alerts: New Developments with Tangible Property Rules

De Minimis Safe Harbor Capitalization Threshold Increase

The IRS has released Notice 2015-82 which has increased the de minimis safe harbor capitalization threshold for taxpayers without an applicable financial statement (AFS) which in most instances is an audited statement.  The threshold is increased to $2,500 from $500 and is effective 1/1/2016.  The threshold for taxpayers with an AFS remains the same at $5,000.  Taxpayers who wish to take advantage of this increase should update their written capitalization policies for the new threshold.

The increase was decided after the Treasury Department and the IRS received more than 150 comment letters indicating the $500 threshold still created an unnecessary administrative compliance burden on taxpayers.   Additionally, commenters successfully demonstrated that $500 was not in alignment with most small business capitalization policies.

The notice also grants audit protection for taxable years before 1/1/2016 for qualifying taxpayers who may have used the $2,500 threshold in years before 1/1/2016.

New Accounting Method for Retail and Restaurant Refresh and Remodel Costs

The IRS has issued Revenue Procedure 2015-56 which provides a safe harbor method of accounting for taxpayers in the retail and restaurant industries.  Qualifying taxpayers in these industries can utilize the safe harbor to determine if costs incurred to refresh and remodel are currently deductible or must be capitalized.   This method allows qualifying taxpayers to deduct 75% of the refresh and remodel costs and capitalize the remaining 25%.

A qualifying taxpayer must fall under the following definition:

1. Must have an applicable financial statement which in most cases is an audited statement;

AND

2. Is in one of the following trades or businesses:

  • Merchandise sales to customers at retail excluding car dealers, gas stations, manufactured home dealers, and non-store retailers;
  • Preparation and sales of meals, snacks, or beverages to customers for immediate consumption on or off the taxpayers’ premises excluding hotels, civic or social organizations, amusement parks, theaters, casinos, country clubs, and special food services such as caterers;
  • Owns or leases a building to a qualified trade or business.

This new method of accounting is effective for tax years beginning after 2013.  Qualifying taxpayers must file Form 3115, Application for Change in Accounting Method, in order to take advantage of the safe harbor.

For any questions regarding these updates, please contact Dan Bottner at dbottner@katzabosch.com or 410.307.2240 or Michael Agetstein at magetstein@katzabosch.com or 410.307.6466.

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