IRS Increases Safe Harbor Amount for Materials and Supplies

Notice 2015-82 released November 24th increases the $500 safe harbor amount to $2,500. This provision is effective for taxable years beginning on or after January 1, 2016.  However if the taxpayer’s use of this $2,500 safe harbor amount is an issue under consideration in examination, appeals, or before the U.S. Tax Court in a taxable year that begins after December 31, 2011, and ends before January 1, 2016, the issue relates to the qualification under the safe harbor of an amount that does not exceed $2,500 per invoice (or per item), AND the taxpayer otherwise satisfies the requirements of the election, then IRS will not further pursue the issue.  [We find it interesting that fiscal taxable years that begin in 2015 and end after January 1, 2016, aren’t covered under the “won’t pursue” provision.  We’re sure this was just an oversight in the wording.]

Review of the rules as adjusted by this Notice.
** $200 – The definition of “materials and supplies” includes property that has an acquisition or production cost of $200 or less.  This $200 is per item.  If the per item breakout is not available, then the $200 test is applied per invoice.   This is an all or nothing provision.  If the item, including all adjustments such as sales tax, cost $201, then the item does NOT fit this provision.

** $,2500 (formerly $500) – The $200 amount above is increased to $2.500 IF:
1) The taxpayer does not have an “applicable financial statement”,
2)  The taxpayer has at the beginning of the taxable year an accounting procedures treating these items as an expense for non-tax purposes,
3) The taxpayer treats the amount paid for the property as an expense on its books and records in according with these accounting procedures, and
4) The amount paid for the property does not exceed $500 per invoice (or per item as substantiated by the invoice).

** $5,000 – The $2,500 amount is increased to $5,000:
1) The taxpayer has an “applicable financial statement”,
2)  The taxpayer has at the beginning of the taxable year WRITTEN accounting procedures treating these items as an expense for non-tax purposes,
3) The taxpayer treats the amount paid for the property as an expense on its books and records in according with its written accounting procedures, and
4) The amount paid for the property does not exceed $5,000 per invoice (or per item as substantiated by the invoice).

An “applicable financial statement” for this purpose is:
1) A financial statement required to be filed with the Securities and Exchange Commission (SEC) (the 10-K or the Annual Statement to Shareholders),
2) A certified audited financial statement that is accompanied by the report of an independent CPA (or in the case of a foreign entity, by the report of a similarly qualified independent professionals) that is used for:
-- a) Credit purposes;
-- b) Reporting to shareholders, partners, or similar persons; or
-- c) Any other substantial non-tax purpose; or
3) A financial statement (other than a tax return) required to be provided to the federal or a statement government or any federal or state agency (other than the SEC or IRS).

ELECTION PROCEDURES
A taxpayer who wants to use the $2,500 or $5,000 safe harbor amounts must attach a statement to a timely filed return (due date plus extensions).  The statement must be titled “Section 1.263(a)-1(f) de minimis safe harbor election” and include the taxpayer's name, address, taxpayer identification number, and a statement that the taxpayer is making the de minimis safe harbor election under §1.263(a)-1(f).

SIDE NOTE – Just because an item falls into the “materials and supplies” expense category does NOT mean it is currently deductible.  It still must meet the incidental v nonincidental tests.  If a cash basis taxpayer pays for an expense that is incidental, such as a book of 20 postage stamps, it is deductible when paid.  If a cash basis taxpayer pays for an expense that is nonincidental, it is deductible when used or consumed in the same manner as Prepaid Supplies.

For example, Taxpayer bought a book of 20 postage stamps in December for $9.80.  Taxpayer used 5 stamps in December and 15 stamps in January.  This is an incidental expense and the entire $9.80 is deductible in December.

An example in the IRS regulations considers toner cartridges to be a nonincidental expense.  In this example a taxpayer purchases a case of 10 toner cartridges for $500 ($50 per cartridge) and installs 8 in printers in the year of purchase and leaves the remaining 2 cartridges on the shelf for the next year’s use.  The example requires the taxpayer to treat the 2 unused cartridges as nonincidental supplies and does not permit a deduction for those until the 2nd year.