The Tangible Property Regulations include a Safe Harbor for small taxpayers.
This safe harbor is an excellent opportunity for (among others) single-family residential rentals, apartment complexes, and student housing.
This Safe Harbor, within the Tangible Property Regulations (under §263a), allows all expenditures under the lesser of $10,000 or two percent (2%) of the unadjusted basis (cost plus upgrades and closing costs minus land) to be expensed. Period. No questions asked.
If there is one, the catch is that this Safe Harbor must be elected EVERY YEAR. So if you’re CPA misses a year, no worries, just have them elect it the following year.
There are two qualifications to take advantage of the Small Taxpayer Safe Harbor:
- You must be a qualifying taxpayer.
- A qualifying taxpayer means a taxpayer whose average annual gross receipts for the three preceding taxable years are less than or equal to $10,000,000. This is PER trade or business.
- If a taxpayer has been in existence for less than three taxable years, the taxpayer determines its average annual gross receipts for the taxable years (including short taxable years) that the taxpayer (or its predecessor) has been in existence.
- If the total amount paid during the taxable year for repairs, maintenance, improvements, and similar activities performed on the eligible building property does not exceed the lesser of two percent of the unadjusted basis of the eligible building property or $10,000, expense it.
If you own an apartment complex with 25 individual buildings, the STSH applies to EACH BUILDING. This can be a huge opportunity even if the expenditures made the buildings better. Depending on the facts and circumstances, this could give the complex owner $250,000 of expenses for the current tax year.
Improvements to the land do not count towards the two percent or $10,000. Instead, these improvements will follow the RABI rules.
Also, you cannot use the Small Taxpayer Safe Harbor retroactively, only in the current tax year.
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 Degree 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.