Usually, when you acquire any tangible property expected to last more than a year, you must recover the cost through depreciation allowances claimed over a number of years. You may be able to elect to expense the cost (up to a set dollar limit), although there are restrictions on this Sec. 179 deduction. Or you may be able to write-off the cost using an IRS-created de minimis safe harbor.
In 2013, the IRS finalized the so-called “repair” regulations that included an optional de minimis safe harbor designed to ease compliance for businesses. Under this safe harbor, rather than capitalizing costs or treating them as materials and supplies, businesses can elect to treat them as ordinary and necessary business expenses (i.e., currently deductible).
The regulations imposes a dollar amount for the de minimis safe harbor that depended on whether a business had an applicable financial statement (AFS), such as an SEC filing, audited financial statement.
- With an AFS: $5,000 per item or invoice
- Without an AFS: $500 per item or invoice
The IRS received more than 150 comments to the regulations saying that the $500 limit was too low to effectively reduce the administrative burden of complying with the regulations’ requirements, and the IRS responded favorably to these comments.
The IRS recently announced that effective January 1, 2016, businesses without an AFS have a dollar limit of $2,500 per item or invoice.
Making the safe harbor election
In order to use this option, you must have a policy for your books and records reflecting the de minimis rule. (Businesses with an AFS must have a written accounting procedure in place at the start of the year in order to use the de minimis safe harbor.) And you must apply the de minimis safe harbor to all expenditures meeting the criteria for the election in the taxable year.
The election is made by attaching 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. This is not a change in accounting method that requires notification to the IRS.
If your business buys tangible property other than supplies and you think this tax-favored rule may be helpful to you, discuss the matter with your tax advisor now. Doing this will help ensure that you use the appropriate treatment for these items in your books and records at the start of the year.