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De Minimis Safe Harbor In Final Repair Regulations

 

The final “repair” regulations were one of the largest guidance projects undertaken by the IRS in recent years. The final rules, which became effective January 1, 2014, include a valuable provision for many taxpayers, especially small businesses. The IRS listened to concerns, again particularly from small businesses, and made a proposed de minimis expensing safe harbor even more taxpayer-friendly.

  

Under the safe harbor, a taxpayer may deduct the cost of most items of property costing $2,500 or less if the taxpayer has an accounting policy in effect at the beginning of the tax year that treats the cost of all items of qualifying property as an expense on the taxpayer’s financial accounting books and records. For tax years beginning before January 1, 2016 the limit was $500 per item.

 

A taxpayer with an applicable financial statement (generally, an audited financial statement) may rely on the de minimis safe harbor if the amount paid for property does not exceed $5,000 per item.  

 

Additionally, the final regulations provide that the de minimis safe harbor applies to a financial accounting procedure that expenses amounts paid for property with an economic useful life of 12 months or less, as long as the amount per invoice (or item) does not exceed $2,500 ($5,000 for taxpayers with an applicable financial statement).

 

The safe harbor does not apply to amounts that must be capitalized under the uniform capitalization rules of Code Sec. 263A, such as amounts paid for improvements.

 

The de minimis safe harbor is an election that is made annually on the tax return. An election statement must be included with the return. Moreover, you must have an accounting policy in place at the beginning of the tax year to expense for financial (book) accounting purposes items eligible for tax expensing under the de minimis safe harbor. The policy must be written if you have an applicable financial statement.

 

If you have any questions about the de minimis rules in the final repair regulations please contact our office. The de minimis rules have a number of specific criteria and applications that are beyond the scope of this letter. In addition to the rules we have highlighted, the final repair regulations contain many other provisions that could help maximize your tax savings.