Many tax practitioners have expressed concern to the American Institute of CPAs (AICPA) that the $500 safe harbor threshold set for the immediate deduction of tangible property in the final regulations is too low to be practical. The Internal Revenue Service (IRS) established the $500 threshold for unaudited taxpayers because it does not have sufficient assurance taxpayers are following taxpayer-established internal accounting policies and procedures.
We asked readers in the last issue of The CPA Advocate to let us know their opinions about what the threshold should be and what could suffice as adequate assurance to the IRS. The responses clearly show that this issue bothers many practitioners and most want change. Approximately 60 percent said that a threshold based on gross receipts should suffice for the IRS, while close to one-third suggested alternatives, such as a threshold based on depreciation (tax or book) or one that is the same as the threshold for those with an audited financial statement.
As shown below, over half of those surveyed thought the threshold should be increased to be between $1,000 and $2,000 and 27 percent preferred an even higher level of $2,000 to $5,000, noting the short life of equipment and that the cost of repairs frequently exceeds $500. However, a few preferred keeping it below $1,000 and 12 percent called for $5,000 or more. One respondent said he/she did not mind the current amount, commenting, “If it gets raised any higher then we will simply have to keep different depreciation schedules for income tax returns and property tax returns.”
What Should Be the De Minimis Threshold for Taxpayers
Who Do Not Have an Audited Statement?
What CPAs Said about the Rules
We asked respondents to explain their answers and provide any relevant client experiences – here is a sample of what they told us:
“I work in industry. It is extremely time consuming to capitalize such small purchases as PC's, laptops, printers, and other items. I feel the $2,000 - $5,000 threshold is more representative of small business capital purchases.”
“The bottom line is that it should not make a difference if you have an audited financial statement or not. Just because you aren't required to have an audit is not grounds to require different policy. In my opinion, it is inequality at the highest level.”
“Many repairs for equipment owned by some industries such as contractors are often between $1,500 and $2,000. It is an accounting nightmare to have to depreciate such items as tires just to have to show a disposal and then replacement tires, etc. two years later.”
The AICPA is reviewing these comments to help develop a recommendation to the IRS and deeply appreciates the time taken by the respondents.