Should you ask forgiveness (rather than permission) or is it better to be safe than sorry?!

We’ve all heard of the saying that it’s often easier to ask for forgiveness than it is to ask for permission. The question is whether this should apply to your dealings with the IRS.

Last month in my blog I wrote about the FAQs recently issued by the IRS to assist with the understanding of the final regulations governing the handling of expenditures for acquiring, producing, and improving tangible property, aka the “repair regs.”

Today I want to look at the new de minimis rule contained in these regs that allows you to expense qualifying property of up to $5,000. This de minimis rule provides an exception so you can deduct a higher amount if the circumstances can support it.

So, what do you do? Expense the larger amount and hope it stands up in court or play it safe and keep the expensed amount under $5,000?

First, it is important to understand that whether or not a business has an “applicable financial statement” (AFS)* affects the dollar amount that may be expensed under this provision:

• $5,000 per item with an AFS, or
• $500 without an AFS.

*An “applicable financial statement” is one that is provided to a federal or state government (or agency), filed with the Securities and Exchange Commission, or is a certified audited financial statement used for credit or reporting purposes.

The applicable limit (either the $5,000 or $500 amount, depending on the circumstances), is per item or per invoice, as long as the business has the following:

• Written accounting      procedures for expensing amounts paid for such property under a specified      dollar amount (less than the ceiling amount) or for property with an      economic useful life of 12 months or less, and
• The taxpayer must expense such amounts on      the financial statement (or on its books if does not have an AFS) in      accordance with these procedures.

The final regulations provide that a taxpayer may deduct an amount in excess of the $5000/$500 amount as long as the taxpayer can show the expensing clearly reflects income. The burden of proof is on the taxpayer who must be able to justify a larger amount.

Obviously, the adage of “better safe than sorry” comes to mind. If a taxpayer wants to be sure to avoid questions from the IRS, one can safely stick to the de minimis limit of $5,000/$500. The automatic acceptance of such expensed amounts is definitely nice to finally have!

Should the de minimis amount be raised?

Among others, both the AICPA and BKD, LLP (a large U.S. accounting and advisory firm) recently urged the IRS to increase the allowable $500 de minimis amount for businesses without an AFS. They have done so per Revenue Procedure 2015-20 in which the IRS requested comments on the appropriateness of the $500 dollar amount.

BKD argues that although a small business unit may not have an AFS, it is possible its accounting department is equally as sophisticated as an SEC-registered company. BKD suggests alternative methods of qualifying under the de minimis safe harbor either by using different thresholds based on industry type or possibly using a specified percentage of gross receipts.

The AICPA, on the other hand, is simply requesting the threshold be increased to $2,500 for those businesses without an AFS.

Now we wait to see if the amount will be raised…