The De Minimis Safe Harbor Annual Election

Written into the Final Tangible Property Regulations (263a) are a set of Safe Harbors that building owners can utilize to increase the amount of expenses each year. Under the final tangible 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.

Taxpayers that have an applicable financial statement (AFS) may use this safe harbor to deduct amounts paid for tangible property up to $5,000 per invoice or item. Taxpayers without an AFS can deduct amounts up to $2,500 per invoice or item. A written accounting policy is required for taxpayers with an AFS. The taxpayer sets the threshold, and if the taxpayer’s accounting policy is less than $5,000, the amount deductible under the de minimis safe harbor is limited to the threshold set by the policy. This policy must be consistently applied for book and tax purposes and must be in place at the beginning of the taxpayer’s year.

For taxpayers without an AFS, the threshold is $2,500, and a written accounting policy is not required; however, having a written policy is advisable. Remember that once this annual election is made, it is irrevocable for that tax year. In order for taxpayers to elect the de minimis safe harbor election, they need to attach a statement titled “Section 1.263(a)-1(f) de minimis safe harbor election” to the timely filed original federal tax return including extensions.  The annual election is not a change in method of accounting, therefore, taxpayers do not need to file Form 3115, Application for Change in Method of Accounting. The IRS has made it easy for taxpayers to elect this safe harbor.