IRS Ups Deduction vs. Depreciation to $2,500 for Computers, Phones

deduction

The Internal Revenue Service has increased the amount small businesses can expense versus depreciate on their taxes each year. It’s a change that should simplify record keeping and increase the amount of a capital investment you can write off in a year.

Specifically, the federal agency has boosted the so-called “IRS safe harbor” limit businesses can deduct on a capital investment within a single year from $500 to $2,500.

A capital investment is one used by a business to acquire, produce, or improve tangible property. It might range from investment in a new building to investment in a new piece of equipment or other new technology.

The IRS says the change is the result of feedback on a request put out to businesses asking for ways to make paperwork easier. The agency says it received more than 150 letters from businesses pointing out that a $500 threshold didn’t cover the cost of many expensed items such as tablet computers and machinery.

For example, purchasing tablets for $2,000 would have to be amortized for four years at $500 each year. Raising the IRS safe harbor threshold for capitalization from $500 to $2,500 would allow for the deduction to come in one year.

Safe Harbor is a term for an amount that the IRS won’t question. As a part of this new rule, the IRS has said it won’t question $2,500 deductions in years previous to the official 2016 start.

IRS Commissioner John Koskinen says in an agency announcement, “We received many thoughtful comments from taxpayers, their representatives and the professional tax community. This important step simplifies taxes for small businesses, easing the record keeping and paperwork burden on small business owners and their tax preparers.”

Capitalization has traditionally taken place over years as a deduction on the depreciation of property that’s intended to last years. But now businesses can deduct a larger expense for technology in a single year leaving depreciation for much bigger ticket items. The IRS safe harbor change affects businesses that do not maintain an applicable financial statement (audited financial statement).

And, as always, deductions can be taken on repair and maintenance costs which are not counted under the $2,500 limit. For taxpayers with an applicable financial statement, the small-dollar threshold remains $5,000.

Deduction Definition Photo via Shutterstock

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Wrong Tax Deduction on Home Loan Can Result in Tax Penalties

Wrong Tax Deduction on Home Loan Can Result in Tax PenaltiesThe purchase of a house, by taking out a home loan, is considered good by personal finance experts, who generally scoff at long-term liabilities.

A house, unlike other personal goods such as cars, is considered to be an asset. There’s tax benefit too. Home buyers can claim an exemption of up to Rs. 1.50 lakh on principal payments for home loan under Section 80C of the Income Tax Act.

Buyers can avail Rs. 2 lakh deduction paid towards interest component of home loan per year.

The above-mentioned benefits apply for self-occupied properties and not for under construction houses. Further, in case of a delayed possession, the tax benefits get reduced substantially. Many a times, tax payers – unaware of this provision – claim full tax benefits on their home loan and get notices from the tax department.

According to Section 24B of Income Tax Act, a person can claim a tax deduction of up to Rs. 2 lakh on the interest paid on a self-occupied house if the possession of the property is done within three years of taking the loan.

In case the possession is given after three years, then the amount of deduction is reduced to Rs. 30,000 per year.

This means in case of delayed possession (when houses are delivered three years after a home loan has been taken), buyers can claim only Rs. 30,000 (15 per cent of the current allowed deduction of Rs. 2 lakh) as exemption.

Those who unknowingly claim exemption can get into serious trouble and may have to pay huge penalties, experts say.

“If the home buyer in such cases still claims interest of Rs. 2 lakh per annum, the tax office could disallow the deduction of Rs. 1.7 lakh per annum which could result in additional tax and interest payable by the home buyer to the tax office. At their discretion the tax office can also levy penalty for claiming excessive deduction,” says Parizad Sirwalla, National Head-Global Mobility Services-Tax, KPMG.

The penalty in this case may range between 100 per cent and 300 per cent of the extra tax deductions claimed, says Amit Maheshwari, managing partner of Ashok Maheshwary & Associates.

Tax experts say that home buyers are getting tax notices for claiming over Rs. 30,000 deduction, despite delayed possession. “As people are getting the possession of the house which they booked five to seven years back now, tax department are scrutinising the returns and people are getting notices from the tax department for the same,” says Sudhir Kaushik, chief financial officer, Taxspanner.com.

Tax experts believe that Finance Minister Arun Jaitley in the budget should relook at the tax benefits offered on home loans. “It may be worthwhile to consider an amendment in the provision not limiting such deduction to Rs. 30,000 per annum in cases where the delay in completion of construction is caused on account of reasons beyond the control of the home buyer,” says Parizad of KPMG.

Tapati Ghosh, partner at Deloitte Haskins & Sells, said: “One of the measures that could be considered is the extension of time limit to 5 years at least for the under-construction properties.”

[“source-ndtv”]