Have You Bought Something for less than $2,500 This Year?

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Have you bought something for less than $2,500 this year?

If so, you may be able to deduct these items in one year, rather than depreciating them. As with many IRS rules, it’s not quite this simple, but it’s very close.

This rule applies to all items except your home. They include, office equipment, computers, furniture, appliances, play equipment, home improvements, fences, patios and driveways.

Old Rule

Under old IRS rules, you had to depreciate items that lasted longer than one year. For many years the IRS allowed family child care providers, under an unwritten rule, to deduct in one year items that cost less than $100.

The new regulation makes it clear than anything purchased for less than $200 can be deducted in one year. If it’s used 100% for your business, deduct 100% of the cost. If it’s used for your business and your family, apply your Time-Space Percentage and deduct the business portion in one year.

The $500/$2,500 Rule

When the new IRS rule was announced in 2013 it said that providers could also deduct in one year items costing more than $200 and less than $500 if you attach a statement to your tax return indicating that you are electing to use this rule.

I had previously written about this: “The End of the $100 Rule.”

In late November of 2015 the IRS increased this $500 limit to $2,500!

Obviously, this makes many more items that you purchase eligible to be deducted in one year, rather than having to depreciate them. There is no limit as to how many items you can deduct under this rule as long as they individually cost less than $2.500.

The $2,500 limit refers to individually invoiced items and includes any sales tax. For example, if you buy furniture and the receipt said, “Furniture – table and chairs – $3,000” you would have to depreciate this under the normal rules of depreciation (7 years for furniture and appliances). But, if the receipt says, “Furniture – 1 table $1000 and four chairs at $500 each” you could deduct all of the furniture in one year.

If the receipt said “Furniture – 1 table $2,600 and two chairs at $200 each”, you could deduct the chairs in one year, but you would have to depreciate the table over 7 years.

Annual Tax Statement

To use this rule you should attach the following statement to your tax return:

“Section 1.263(a)-1(f) De Minimis Safe Harbor Election

Your name _________________

Your address __________

EIN or Social Security Number __________

For the year ending December 31, 2015 I am electing the de minimis safe harbor under Treas. Reg. Section 1.263(a)-1(f) for my business expenses of less than $2,500.”

I would recommend entering these expenses on IRS Form 1040 Schedule C, Part V Other Expenses.  Add up all the items you are deducting under this rule and put them on one line and call them “De minimis safe harbor expenses.”

This rule must be elected each year you want to use this rule. So, you need to attach a similar statement to your tax return for each subsequent year you purchase items costing more than $200 and less than $2,500.

You can start using this rule for your 2016 taxes. However, the authors of the rule also said that if you use it on your 2015 taxes and are audited, the IRS won’t challenge you. Talk to your tax preparer if you want to use this rule for 2015.

If the item is purchased as part of a larger home improvement, it must be added to all the costs associated with the improvement and depreciated over 39 years. For example, if you bought a $400 bathroom sink as part of remodeling your bathroom, you’d have to depreciate it over 39 years along with the rest of the cost of the remodeling. If you only replaced the sink you could deduct it in one year.

Section 179 Rule

Another IRS rule, the Section 179 rule, allows you to deduct in one year items not permanently attached to your home or land if you use them more than 50% of the time in your business. This rule has been around for many years.

For example, if bought a $800 couch that was used 100% of the time for your business, you could deduct $800 by entering it on IRS Form 4562, Part I.

With the new $2,500 rule, there will be much less reason to use the Section 179 rule because you don’t have to use items more than 50% of the time in your business to be able to deduct them in one year. Section 179 will probably only be used for individual items you purchase than cost more than $2,500 and you use more than 50% of the time for your business.

Examples

Here are some examples of how to use this rule. We will use a Time-Space Percentage of 35% in these examples.

  1. $190 stroller used 100% for business = $190 deduction.  No need to attach a statement because it’s less than $200.
  2. $2,000 washer and dryer x 35% = $700 deduction. Attach a statement.
  3. $3,600 swing set x 35% = $1,260 deduction. Depreciate over 7 years.
  4. $3,600 swing set used 75% for business = $2,700 deduction. Use Section 179 rule and deduct in one year on Form 4562.

This rule change should make it much easier for family child care providers to deduct expenses without having to worry about the complicated depreciation rules.

See IRS Notice 2015-82.

Note: This article has been updated since it was first published. See “Clarification of the $2,500 Rule.”

Tom Copeland – www.tomcopelandblog.com

Image credit:https://www.flickr.com/photos/eoincampbell/

 

 



Categories: Deductions, Depreciation and Home, Record Keeping & Taxes

15 replies

  1. Don’t know if you can help with my question, but I’m having trouble understanding what the IRS wants from the typical sole proprietor.

    On the IRS’s FAQ page about tangible property regulations, they have this:
    “If you don’t have an AFS, are you required to have a written accounting procedure at the beginning of your taxable year to qualify for the de minimis safe harbor election in that year?
    “If you don’t have an AFS, you are not required to have written accounting procedures; ***however, you must expense amounts on your books and records for the taxable year in accordance with a consistent accounting procedure or policy existing at the beginning of the taxable year.”***

    The starred part is what I’m having trouble with. I’m the sole proprietor of a (very) small business with modest income and few expenses. I use cash basis accounting, and I have pretty much three folders (income, expense, and assets) containing receipts, and I use Quicken to track everything. What “consistent accounting procedure” can I use to satisfy the requirement? Any help or pointers would be appreciated.

    The FAQ is here:
    https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Tangible-Property-Final-Regulations

  2. The closest thing I have to a “policy” is that I always elect a Section 179 deduction when a purchased asset qualifies.

  3. Thoughtful article . I loved the points – Does someone know where I could possibly acquire a blank IRS 1040 example to edit ?

  4. Thank you so much for your blog! It has been so helpful to me. My question is: I’m deducting a lawnmower that’s $199.99 before taxes. I know I’ll need to do the t/s%, which will put me below $200, but the taxes initially put it above $200. So:
    1) Do I attach the note?
    2) Where does this deduction go? Am I just doing the t/s calculation and inputting the amount on its own line with “other” expenses or is there a special place for these types of deductions?

    Thank you again!

    • When determining whether to apply the $200 rule, you must use the original purchase price, plus sales tax, not the amount after applying your time-space%. If the item costs less than $200 you don’t need to attach any note to your tax return. If the item costs more than $200 and less than $2,500 you can still deduct it in one year but you must attach a note that says you are using this new $2,500 rule. Claim the deduction on Schedule C, line 27a and call it “Equipment”.

  5. Hi,

    What would be the journal entries for assets that would normally be depreciated, when you have elected the deminis safe harbor?

    Can you credit the cash account and debit an expense account (deminis safe harbor expenses) as mentioned; and if so, do all expenses under the $2500 go in this expense account?

    Thanks for your help!

    BA

    • You can call it whatever you want: Equipment, Household Items, etc. Yes you can credit the cash account and debit an expense account and put all expenses under $2,500 in this account.

  6. What about a new Deck. Needs to be replaced. But my tax lady said that I can’t deduct it. BUT I need it for daycare access to the backyard. And another emergency escape route. How would this work into my deductions? Thank you

    • You can absolutely deduct the purchase of a new deck. Ask your tax person why you can’t. It’s an “ordinary and necessary” expense that is will be used by your business. It’s a home improvement that is normally depreciated over 39 years, although a new rule may allow you to deduct the business portion in one year. See my article on this:http://tomcopelandblog.com/how-do-i-deduct-a-deck

  7. I just purchased new carpet in my house for the daycare area which cost 1900.00. I am confused as to how I would put this in Kid Kare with the nes 2500 rule? Do I still T/S this and then depreciate it for one year?

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