April 6, 2017

De Minimis Safe Harbor Election – Frequently Asked Questions

Frequently Asked Questions
In 2014, the long awaited final IRS tangible property regulations were issued by the IRS. However ongoing modifications and changes have left many business owners and taxpayers with questions on how to apply the new rules. One of the most popular parts that raises questions is the de minimis safe harbor election. Using this election, a taxpayer can apply the safe harbor on amounts paid to acquired or produced tangible property to the extent that such amounts are deducted for financial accounting purposes. This is beneficial because property owners, landlords and others can deduct the cost of property items used regardless of whether they would be classified as a repair or capital improvement. The election allows taxpayers to receive an immediate tax benefit that may not otherwise be available. To help clients, prospects and others understand the de minimis safe harbor election, Wilson Lewis has compiled a list of FAQ and answers below provided by the IRS.

Frequently Asked Questions

•  What is De Minimis Safe Harbor Election? – Under the final tangibles regulations, a taxpayer may elect to apply a de minimis safe harbor to amounts paid to acquire or produce tangible property to the extent such amounts are deducted by you for financial accounting purposes or in keeping your books and records. If you have an applicable financial statement (AFS), you may use this safe harbor to deduct amounts paid for tangible property up to $5,000 per invoice or item (as substantiated by invoice). If you don’t have an AFS, you may use the safe harbor to deduct amounts up to $2,500 ($500 prior to 1-1-2016) per invoice or item (as substantiated by invoice). These limitations are for purposes of determining whether expenses qualify under the safe harbor; they aren’t intended as a ceiling on the amount you can deduct as business expenses under the IRC. The de minimis safe harbor election does not include amounts paid for inventory and land. Additionally, it does not apply to rotable, temporary, and standby emergency spare parts that the taxpayer elects to capitalize and depreciate.

• How Do You Elect to Use De Minimis Safe Harbor? – 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 the taxable year in which the de minimis amounts are paid. The statement should include your name, address, and Taxpayer Identification Number, as well as a statement that you are making the de minimis safe harbor election. Under the election, you must apply the de minimis safe harbor to all expenditures meeting the criteria for the election in the taxable year. An annual election is not a change in method of accounting. Therefore, you should not file Form 3115, Application for Change in Method of Accounting.
• Using the Election, is it Necessary to Capitalize all Expenses that Exceed $2,500 or $5,000 Limitations? – No. Amounts paid for the acquisition or production of tangible property that exceed the safe harbor limitations aren’t subject to the de minimis safe harbor election. Therefore, the safe harbor doesn’t require you to capitalize all amounts paid for tangible property more than the applicable limitation. If an amount doesn’t qualify under the de minimis safe harbor, you should treat the amount under the normal rules that apply, i.e., currently deductible if paid for incidental materials and supplies or for repair and maintenance. This treatment is proper regardless of whether the amount exceeds the applicable de minimis safe harbor limitation. 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.
• How Does the De Minimis Safe Harbor Affect the Deductions you Typically Take for Materials and Supplies or Repairs and Maintenance?- In general, when you elect the de minimis safe harbor, materials and supplies that also qualify under your de minimis safe harbor are treated as de minimis costs and are not treated as materials and supplies. However, the de minimis safe harbor doesn’t change your ability to deduct costs for materials and supplies, incidental or non-incidental, that don’t qualify under the de minimis safe harbor.
• How Does the Increase in the De Minimis Threshold from $500 to $2,500 Effective 1-1-2016 Affect Years Prior to 1-1-2016? – The IRS will provide audit protection to eligible businesses by not challenging the use of the new $2,500 threshold for amounts paid in tax years beginning in 2012 and prior to 2016 if the taxpayer otherwise satisfied the requirements.

Contact Us

Tangible property regulations are complex and the de minis safe harbor election is no exception. If you have questions about this election and how it applies to your situation, Wilson Lewis can help. For additional information please call us at 770-476-1004, or click here to contact us. We look forward to speaking with you soon.