De minimis Safe Harbor: An Administrative Convenience for the Service and the Taxpayer
The Tangible Property Regulations under §263a provide three safe harbors designed to help small and large taxpayers avoid the Regulations’ complex and sometimes confusing nuances. These Regulations determine whether expenditures spent on assets currently in service must be expensed or capitalized.
The safe harbors allow taxpayers to use a simplified approach if the facts and circumstances apply. One safe harbor is called the de minimis safe harbor (DMSH) and is designed as an administrative convenience for small expenditures, which helps both the Service and the taxpayer.
“The de minimis safe harbor is simply an administrative convenience that generally allows you to elect to deduct small-dollar expenditures for the acquisition or production of property that otherwise must be capitalized under the general rules.” – The IRS
The rules are complex but can be simplified into a few general rules:
- Any expenditure not part of a larger overall project or effort can be expensed if the expenditure is less than $2,500 or $5,000 if the taxpayer has an AFS. The Regulations define an applicable financial statement as a financial statement that meets one of the following requirements:
- A financial statement required to be filed with the SEC
- A certified audited financial statement that is supplemented with an independent CPA’s report that is used for reporting to shareholders or partners for nontax purposes.
- A financial statement required to be provided to the federal or a state government other than the SEC or IRS
- The expenditure MUST have an invoice under the dollar limitation of the DMSH.
- You must elect the DMSH every single year! According to the IRS, “you should attach a statement titled “Section 1.263(a)-1(f) de minimis safe harbor election” to the timely filed original federal tax return including extensions” for each tax year you want to take advantage of the de minimis safe harbor.” … “The statement should include your name, address, and TIN, as well as a statement that you are making the de minimis safe harbor election.”
- For the tax year the DMSH is elected, all expenditures under the limit MUST be expensed. You cannot pick and choose.
- An annual election like the De minimis safe harbor or the Small Taxpayer safe harbor is not a change in method of accounting, so no Form 3115 is required.
The Tangible Property Regulations, which are mandatory, were passed in 2013, and ALL taxpayers must follow the rules set forth by the IRS.
Kevin Jerry is a nationally recognized expert in Tax Method Changes. He specializes in Cost Segregation, Tangible Property Regulations, and revenue recognition changes. Kevin graduated cum laude from the University of Cincinnati with a Master of Science in Real Estate Taxation. Over the last seven years, he has worked with Eric Wallace on the Tangible Property Regulations with some of the largest property owners in the country.