Tax Insights

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Expense Your Property under the De Minimis Safe Harbor

The IRS issued regulations in 2013 & 2014 trying to bring clarity to the many conflicting rules in the area of capitalization vs expensing of business property. These new regulations are commonly called the “tangible property regulations”.

The new regulations apply to tax years beginning in 2014 and include new “safe harbors” and definitions which affect all businesses that have depreciable property or pay for supplies and repairs.

One new taxpayer friendly provision is the de minimis safe harbor.

This safe harbor allows business taxpayers to elect to expense small items of tangible property versus adding them to the depreciation schedule. The safe harbor has a dollar limit on the maximum allowed per item or per invoice.

For taxpayers with an applicable financial statement (AFS), the maximum dollar limit per item or invoice is $5,000.

  • An applicable financial statement (AFS) is:
  • A Financial statement required to be filed with the Securities and Exchange Commission (SEC), such as a 10-K or the Annual Statement to Shareholders.
  • A Certified audited financial statement accompanied by the report of an independent CPA, or
  • Financial statement (other than a tax return) required to be provided to the federal government, state government or federal or state agency (other than the SEC or the IRS) [Reg. 1.263(a)-1(f)(4)].
  • To use the safe harbor, taxpayers must have both a written policy in place at the beginning of the tax year for expensing amounts under a certain dollar amount and must treat the amounts as expenses on the financial statements in accordance with the policy.

For taxpayers without an AFS the limit for the de minimis safe harbor is $500 per item or invoice.

To claim the safe harbor election, you must file an election statement with your tax return each year.

Don’t miss this election that can simplify your fixed asset schedule and lower your taxes!

By Melinda Nelson, CPA & Michael Willett