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How to Navigate the De Minimis Safe Harbor Election

Navigating the complexities of asset management and tax regulations can be daunting for any business owner. One aspect that often raises questions is how to handle the costs associated with acquiring, producing, and improving tangible personal property.

The IRS requires that you capitalize (and depreciate) the costs to acquire, produce, and improve tangible personal property, regardless of the size or cost incurred. Each asset has a specified class life, determining the number of years over which you must depreciate it.

The De Minimis Safe Harbor Election is a way to simplify this process—if you know how to navigate it.

How to Elect the De Minimis Safe Harbor Election

Follow these steps to utilize the election:

  1. Attach the Election with Each Tax Return: The election statement must be attached to your tax return every year.
  2. Establish a Policy for Your Books and Records: Maintain a clear and consistent policy summarizing your approach to capitalizing property. This policy should be documented and available for review.
  3. Keep it Consistent: Make sure your policy is consistent for both book and tax purposes. Inconsistencies can lead to complications and potential IRS scrutiny.

Key Points to Keep in Mind

The De Minimis Safe Harbor Election is designed to ease the administrative burden of tracking and depreciating small-dollar expenditures. Here are some important nuances to keep in mind:

  • Immediate Write-Off: This election allows you to immediately expense assets costing up to $2,500 per invoice.
  • Flexible Threshold: While the standard limit is $2,500, you can elect a lower threshold if it suits your financial strategy. However, you cannot choose a higher limit unless you have audited financial statements.
  • Record-Keeping Relief: The primary goal of this election is to alleviate the record-keeping burden associated with small-dollar expenditures.
  • Annual Adjustments: The threshold amount can be adjusted annually based on your financial needs. For instance, if you experience a loss but need to show income for bank purposes, you can reduce the threshold to $500 for that year. The key is to maintain consistency throughout the entire year for both book and tax purposes.

A Valuable Tool for Businesses

The De Minimis Safe Harbor Election is a valuable tool for simplifying the depreciation and capitalization of small-dollar assets. Keep this election top of mind the next time you are considering an asset purchase.

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Biz Tip Topic Expert: Craig Maternowski, CPA

Craig Maternowski, CPA

Craig is a Principal with SVA Certified Public Accountants and works closely with business owners and their management teams to advise them on accounting and tax issues.

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