Many real estate, construction and other business owners are aware of the IRS tangible property rules issued by the IRS in 2014.
The rules made significant changes to how companies capitalize versus expense materials, supplies and other items related to the construction or improvement of real property. These changes created new tax saving opportunities for many companies. However, since the original rules were released many modifications have been made leaving many businesses with questions about how to apply the new rules. A key area where we receive the most inquiries is the De Minims Safe Harbor Election. This election is very important because it permits property owners, landlords and others to deduct the cost of property items used regardless if they are a repair or capital improvement, which permits an immediate tax savings. To help clients, prospects and others under the safe harbor election, Hanson & Co has compiled a list of the most commonly asked questions.
What is the De Minimis Safe Harbor Election? – Under the final tangibles regulations, you 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.
If you use the De Minimis Safe Harbor, do you Have to Capitalize All Expenses that Exceed the $2,500 ($500 prior to 1-1-2016) 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.
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. Similarly, the de minimis safe harbor doesn’t change your ability to deduct repair and maintenance costs that don’t qualify under the de minimis safe harbor, for example, costs that exceed the safe harbor threshold. Therefore, for costs that don’t qualify under the de minimis safe harbor, you apply the general rules for identifying and deducting repair and maintenance costs, incidental supplies, and non-incidental materials and supplies.
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.
The IRS tangible property rules and de minimis safe harbor election guidelines can be complex and confusing. Real estate, construction and other companies can benefit from the recent changes and obtain additional tax savings when correctly applied. If you have questions about the de minimis safe harbor or need assistance with another tax planning issue, Hanson & Co can help. For additional information please call us at (303) 388-1010, or click here to contact us. We look forward to speaking with you soon.