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Business and Rental Property Elections

Small Taxpayer Safe Harbor for Purchases of Tangible Property

When you purchase an item for use in your business and it has an expected life of more than one year, you are required to capitalize the item (classify as an asset on your balance sheet) and systematically write off to expense the cost of the asset using applicable IRS methods  While this can result in full write off in the year of purchase, you may have to recapture some of the expense if you sell the asset before its estimated useful life.  In all cases, you are required to maintain an asset list of capitalized items.

Enter the De Minimis Safe Harbor Election under Section 1.263(a)-1(f).  This election allows you to expense an item that ordinarily meets the capitalization requirement.  Since 2015, the safe harbor limit is $2,500 per item (as substantiated by an invoice).  What this means is you don’t have to capitalize items costing $2,500 or less, don’t have to maintain an asset list, and don’t have to worry about depreciation methods; in other words, it simplifies paperwork and bookkeeping for small business owners.

This is an annual election and is made by including a statement on your timely filed tax return that you are making the election.  You are required to have a written capitalization policy indicating that your capitalization limit is $2,500 (meaning items costing more than $2,500 are capitalized and items costing $2,500 or less are expensed under the safe harbor).  The written policy can be simply a title (capitalization policy), a single sentence indicating your capitalization threshold, and it should be signed/dated.

Small Taxpayer Safe Harbor for Repairs and Improvements

Property owners may currently deduct in a single year the cost of building repairs but must depreciate over several years the cost of building improvements.  Unfortunately, the difference between an improvement and a repair has been the subject of many disputes with the IRS.

Enter the Safe Harbor for Small Taxpayers Election under Section 1.263(a)-3(h).  If you qualify to use it, you may currently deduct all your expenses for repairs, maintenance, improvements, and other costs for business real property, including rental property.

A property owner may use the safe harbor only if the total amount paid during the year for repairs, maintenance, improvements, and similar expenses for a building does not exceed the lesser of $10,000 or 2% of the unadjusted basis of the building.  This limit is determined on each property separately.

This is an annual election and is made by including a statement on your timely filed tax return that you are making the election.