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This small taxpayer safe harbor (STSH) under §1.263(a) – 3(h), is an overlooked and misunderstood tax saving opportunity which allows many repairs that would normally be depreciated in the current tax year, to now be expensed. The main recipients of the benefits of the small taxpayer safe harbor are single family residential rentals including VRBO and Air B&B’s, apartment complexes with multiple buildings and student housing.
This small taxpayer safe harbor within the Tangible Property Regulations (under §263a) allows all expenditures on the lesser of $10,000 or two percent of the properties original cost minus land.
It doesn’t matter if the expenditure betters the property, expands the property, affects a large percentage of the like components, or was done less than two years after occupancy. Normally, these expenditures would have to be capitalized under Tangible Property Regulations.
The small taxpayer safe harbor (STSH) along with the de minimis safe harbor (DMSH) must be elected every single year.
To take advantage of the small taxpayer safe harbor, there are two very essential qualifications:
- You must have average annual gross receipts of less than $10,000,000 for the three preceding taxable years in each individual trade or business. If a taxpayer has been in existence for less than three taxable years, the taxpayer establishes its average annual gross receipts (AAGR) for the taxable years the trade or business has been in existence.
- The total paid during the taxable year for repairs, improvements, and similar activities completed on the property does not exceed the lesser of two percent (2%) of the unadjusted basis (purchase price plus closing costs minus land) of the property or $10,000.
A major opportunity with the small taxpayer safe harbor is for apartment complexes with separate buildings. The two percent or $10,000 can be applied to each building as long as they are not connected in any way.
Improvements to the land also do not count towards the two percent or $10,000. They will follow the same capitalization versus expense rules under The Tangible Property Regulations.
Unlike the routine maintenance safe harbor, you cannot use the small taxpayer safe harbor retroactively, only in the current tax year.