When most people talk about the “safe harbor” they're referring to paying enough taxes via your withholdings and quarterly estimated payments to avoid having to pay any penalties or interest. But there is another safe harbor you should know about, especially as a business owner.
There is also a safe harbor for business expenses. Prior to 2016, it was $500, but since then it is $2500. That means you no longer have to “capitalize and depreciate” anything you buy for your business (computer, furniture, etc.) over time, so long as each individual item costs less than $2,500. You can simply deduct it all (“expense it”) the year you buy it. When searching for information on this topic, what you're looking for is “Tangible Property Expenses” and specifically the “de minimis safe harbor”.
De Minimis Safe Harbor Examples. Reporting “De Minimis Safe Harbor” Expenses Schedule C
There is a requirement to attach a statement to your taxes stating you are electing to deduct this expense all in year one, but you can list the expense itself anywhere on your Schedule C as a sole proprietor. If you really want to dot your i's and cross your t's, you might consider totaling them all up on Line 27a (Other Expenses), calling them “Section 1.263(a)-1(f) De Minimis Safe Harbor Election expenses”, but that's not required. You do need to be careful if you choose to put these expenses on other lines of Schedule C if you are using Turbotax or H&R Block because the software will likely still prompt you to depreciate them. Seems easiest to me to just put them on line 27a. If it's just one sub-$2500 item, it might look like this:
Even if you had a bunch of items that were less than $2500 each, you could still do it this way:
If you're a partnership filing a 1065, you usually end up putting these expenses on line 20 (and attaching a statement):
If you're filing as an S Corp (Form 1120-S), it's the same thing but it goes on line 19:
How to Take Advantage of the De Minimis Safe Harbor
So how can this be useful? The main benefit for me is that I can just expense a computer, a phone, a printer, office furniture, and other similar expenses rather than hassling with the depreciation rules. But getting that deduction sooner rather than later is more valuable due to the time value of money.
You can also use this $2,500 safe harbor for repairs and maintenance expenses. In fact, you may be able to go over $2500 and still be in a safe harbor under two other scenarios:
First, If the business has revenue < $10M and the property is worth less than $1M, then you can expense up to $10,000 or 2% of the value of the property, whichever is less, in repair/maintenance expenses.
Second, all repair expenses can be deducted immediately if the repairs consist of routine maintenance and satisfy four criteria:
- The repairs are regularly recurring activities that you would expect to perform.
- The repairs result from the wear and tear of being used in your trade or business.
- The repairs are necessary to keep the property operating efficiently in its normal condition.
- The repairs are expected to be necessary more than once during a 10-year period for buildings and structures related to buildings, or more than once during the property's class life for property other than buildings.
These rules also apply for improvements, which normally have to be depreciated, subject to the $10,000 or 2% of property value rule and the $10M/$1M rule noted above. This is great for direct real estate investors.
What Should Your Statement Look Like?
It doesn't have to be anything special. Tom Copeland suggests you make it look like this:
Section 1.263(a)-1(f) De Minimis Safe Harbor Election
Your name _________________
Your address __________
EIN or Social Security Number __________
Does this picture mean I can write off our Salmon float trip as a business expense?
For the year ending December 31, 2015 I am electing the de minimis safe harbor under Treas. Reg. Section 1.263(a)-1(f) for my business expenses of less than $2,500.
Keep the de minimis safe harbor rule in mind as you purchase things for your business. It'll save you a little bit of tax money and a lot of hassle if you can avoid having to depreciate your business expenses and can expense them instead.
What do you think? What are some examples of how you have used the $2,500 safe harbor to make your business life easier? Comment below!
Thanks for explaining this! One question. Suppose you purchase a piece of equipment for say, $2000, and expense it under the de minimis safe harbor rule. If the piece of equipment is disposed of in the next tax year, do you have to pay depreciation-recapture tax on that property?
No. It’s basically already fully depreciated.
This is awesome information, thanks for bringing this to light. For s single family rental unit, if you spent $8000 to install an HVAC, $1000 on a new refrigerator and $1000 for a new stove, they were considered capital expenditures and were depreciated over five to 27.5 years, depending on their classification. Now under “de minimis safe harbor,” you can deduct $10,000 for 2019 as long as revenue doesn’t exceed $10M and the property is worth less than $1M. Does the $1M cap apply to each property? For example if you own six properties together worth $5M, but individually less than $1M, are you supposed to apply the $10,000 cap for the overall business or can you apply it to each individual property? Just a general question, I know I have to confirm with my accountant.
Good question. I think the cap is per piece of property owned by the business.
From the information I researched, you are correct, they can apply to each property. Thanks again for letting us know.
Not sure you or your lawyer can do anything about this…but I just got an email from this:
https://www.whitecoatinsurancegroup.com/
I know it’s not you (at least I think it’s not you)…but thought you might like to know.
I’ve been instructed not to comment on ongoing legal matters, but do forward instances when a trademark violator confuses you.
Understand….but just for the record, I was confused when I got the email.
After digging in I figured it out, but pretty solid name infringement in my opinion. Obviously I’m no lawyer. Good luck,
I’ll pass that on to the attorneys. Actual confusion is the best evidence of potential confusion, a necessary aspect of trademark violation.
Lets say I buy a computer in 2019 for $2500 as a business expense. Can I then buy another computer in 2020 for $2500 as a business expense? A business person in my group told me that the IRS “lifespan” of a computer is 3 years. Thus, I can’t purchase another computer until 2022. Is this correct?
Why can’t your business have more than one computer? Mine does.
Can I still file taxes electronically, if a statement needs to be written up as you’ve explained above? If so, how would I include it in the electronic filing (or would I just send separately by snail mail?)
Good question. Not sure if tax software allows you to add a statement. It wouldn’t surprise me if it does, but I generally mail my return so I don’t know for sure.
I had this exact same question and it took me forever to figure out the solution. After extensive online searching, and looking through sections of TurboTax, I finally figured out how to get TurboTax to attach the Section 1.263(a)-1(f) De Minimis Safe Harbor Election statement for tangible property such as computer equipment. In my situation, all of my business expenses were entered under “Other Common Business Expenses” under “Business Expenses.”
In the downloadable version of the software, under “Business Income and Expenses” -> “Business Assets”, click “Start” or “Update”, then:
“No” to the first question of “Do you want to go directly to your asset summary?”
“Yes” to “Did you buy an items for any business, rental property and/or farm that cost $2,500 or less in 2019?” IGNORE THE PART “Don’t include any items you’ve already entered as expenses.”
“Yes” and “Yes” to the questions under the section “Let’s see if you can deduct these items as expenses”
Continue on from there.
Going into the “Forms” mode of TurboTax, and looking toward the bottom, there should be an entry titled “Reg. 1.263(a)-f” with the statement:
“The taxpayer elects to make the de minimis safe harbor election under the Regulation 1.263(a)-1(f)” followed by name, address and SSN.
The solution is not intuitive since the questions that need to be answered to get the statement are in a separate section (Business Assets) from where you enter the expenses (Business Expenses). Moreover you have to incorrectly answer the Turbotax question “Did you buy an items for any business, rental property and/or farm that cost $2,500 or less in 2019? Don’t include any items you’ve already entered as expenses.”
Almost all other answers online for the de minimis safe harbor election were in reference to real estate, which has a different solution. I finally found a pertinent answer here:
https://ttlc.intuit.com/community/business-expenses/help/what-can-i-expense-or-depreciate-with-the-business-safe-harbor-election/00/26516
Thanks for sharing your knowledge!
What if the business expense is $3000… can i deduct 2500 of it?
I don’t think so. But maybe you can split it into two separate items?
I have a rental. My CPA told me that although I can deduct expenses using De Minimis safe habor, at best I will eliminate my rental income, but I am limited in that I cannot take passive losses (rental) against the ordinary income I earn (physician’s job) due to high income. So my renovation expenses either get added to the basis of the home and reduce any capital gain for me later down the road, or I can offset passive income that I may have from other sources now or in the future.
Is that true?
Yes. The only ways around it are to earn less money or qualify for real estate professional status (750+ hours and nothing you do more than that.)
What about items purchased in prior years that are being on a schedule? Can the de minimis safe harbor election be used to fully depreciate the remainder this year?
I don’t think so, but I’m not 100% sure.
Numbers. Is it true that the max allowed for de minimis safe harbor is 2% of adjusted basis? The basis for our small rental is about $100,000 (purchase price was $130K). That would mean the max is $2000?
We recently upgraded items ourselves. Popcorn ceiling removal $700. Tile flooring $4000. New baseboards $500. New door hardware $400. We did purchase the tile in small lots over a month but it was all part of one reflooring job.
According to Nolo, it’s not basis, it’s value. And it’s the lesser of 2% or $10K. And the building can’t be worth more than $1M. And you can’t have more than $10M in revenue in the last 3 years. It’s really aimed at the small landlord.
https://www.nolo.com/legal-encyclopedia/small-taxpayer-safe-harbor-for-repairs-improvements.html#:~:text=The%202%25%20of%20the%20adjusted,on%20a%20per%20building%20basis.
I like what you are saying, but even the link you provided seems to mix up unadjusted basis and adjusted basis. And both seem to be derived from the original purchase cost. So even though our rental has doubled in value, it appears that we have to use numbers from the time of purchase.
Also confusing is the difference between “Safe Harbor for Small Taxpayer” (SHST) and “De Minimis Safe Harbor”. De Minimis Safe Harbor introduces another limit of $2500, and some articles indicate right or wrong that the 2%/10K rule still applies.
Oh bother.
Sorry its so confusing!
If one has performed improvements that exceed the $10k de minimus election, do you happen to know if one can expense the $10k and depreciate the remainder?
I put a new kitchen in a property. Used the $2500 rule last year for each of the appliances but have a contractor bill for $40k that I paid this year.
I think so but this is definitely not my area of expertise. You need a more reliable source before claiming it!
Assuming this is for a vacation rental home filed on schedule E, where would it go on the schedule E ? Line 19 as “other” ? And it would be listed there something like …
Dishwasher – Section 1.263(a)-1(f) De Minimis Safe Harbor Election expense
I found another website that says list it under line 14 repairs and/or line 19 other
Repairs – include all repairs made to the property that were not considered capital improvements. Expenses here will be small repairs and not the replacement of floors, roofing, etc. You may also include De Minimis Safe Harbor expenses here if they are less than $2,500 and you make the annual election.
Other (list) – include all other expenses incurred while operating the rental but that did not directly fit into any of the categories above. Examples of these expenses may include bank fees, education, HOA fees, subscriptions, cost of books, De Minimis Safe Harbor (if not reported in repairs), meals and entertainment, and gifts to clients or tenants. You will itemize each of your “other” expenses on a separate page.
Does the De Minimis deduction require the equipment to be 100% business use or can we use the deduction for the percentage of business use?
For example a home business & the purchase of a computer. It is unlikely that it is NEVER used for personal use.
I think the % is fine, but if you’re really curious, ask an accountant.
Don’t sweat a tiny % of personal use; the hospital computers get used to surf WCI and I assure you the hospital is writing them off 100%.
If the de mininimis expenses (such as chairs, rugs, lamps)is for a vacation home that is owner occupied more than 15 days per year, may it be expensed the first year, or is the de minimis exception inapplicable because the rental of the vacation home is not a “trade or business”?
I don’t think the 15 day rule has anything to do with this. But you obviously can’t take a business deduction for a personal expense. It would have to be pro-rated.
Hi,
I am not electing for ‘Safe harbor’ and ‘de mininimis’.
I have a single rental property and i have put my maintenance expenses under Other Expense .
When i submit my return, it ask for a pdf of ‘Federal Revenue Procedure 2019-38 – Section 199A Trade or Business Safe Harbor Rental Real Estate’
Not sure what to do.
Any help is appreciated.
Prasanna Rao
Not sure what your software wants either.
Im filing a joint return with my husband, he is a w2 employee Im self employed. The de minimum document that HR block attaches has his name and social instead of mine. He is the first name on the tax return, is this why and does it matter?
That’s interesting. Not sure why. Doubt it matters but double check his name isn’t on the Schedule C. That might explain it.
I resolved that issue but find I have another.
I got married several years ago, the “we” bought a house. My husband is the only one on the mortgage and title, my question is can I now use the regular method instead of the simplied method for purposes of the home office? I dont “rent” and technically I dont own, he is a w-2 employee, Im a realtor, so self employed and we are filing a joint return.
I don’t think the IRS cares who is on the title if you live there. If you pay the expenses, you can use the regular method. I wouldn’t expect any trouble from the IRS.