The Tangible Property Regulations were made mandatory on January 1, 2024 (under §263a) and provide three safe harbors designed to help small taxpayers avoid the headaches and confusing details of the Regulations. As a reminder, the Tangible Property Regulations (TPRS) determine whether expenditures spent on buildings currently in service must be expensed or capitalized. In addition, ALL taxpayers are required to follow the rules set forth by the IRS.
The three safe harbors are an administrative convenience that, in theory, allows taxpayers to use a simplified approach to depreciating or expensing an expenditure. One of the safe harbors is called the de minimis safe harbor (DMSH), and it was designed for small expenditures, helping not only the Service but also the taxpayer.
“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.”
The rules around the de minimis are easy, at least compared to the other safe harbors, but still have some hard requirements:
- Any single expenditure that is not part of a larger overall project can be expensed if the expenditure is less than $2,500. If a taxpayer has an applicable financial statement, the expenditure limit is $5,000. The Regulations define an applicable financial statement as:
- A financial statement is required to be filed with the SEC.
- A certified audited financial statement.
- A financial statement is required to be provided to the federal or state government.
- The invoice for the expenditure MUST be under the dollar limitation of the DMSH.
- If the expenditure includes additional items like shipping or installation, which take the expenditure over the $2,500 limit, separate the invoices so the safe harbor can be used.
- The DMSH must be elected each and every year.
- Per the IRS, a statement titled “Section 1.263(a)-1(f) de minimis safe harbor election” should be attached to the timely filed tax return for each year the de minimis safe harbor is used. The statement needs to include your name, address, TIN, and a declaration that you are making the de minimis safe harbor election. Again, this is an annual election.
- All expenditures under the $2,500 or $5,000 limit MUST be expensed for the tax year in which the DMSH is elected.
- A Form 3115 is not required for an annual election like the De minimis safe as it is not a change in method of accounting.
- Book and Tax depreciation schedules need to match with the DMSH.