IRS Safe Harbor Rules questions
OK, I have done a bunch of reading and still finds some of the new rules confusing. So I have a few specific questions on these new safe harbor rules.
There are some very helpful existing blogs and threads covering these topics in general.
One very helpful blog is Brandon Hall's blog:
Understanding the Safe Harbor Rules and Keeping Money in Your Pocket,
as well as Robert Steele's thread:
De Minimis Safe Harbor Election (expense rather than depreciate?)
and the respective IRS publications.
After combing through all those, and looking at my own scenerios, I have the following specific questions.
(1) Election
The three safe harbor rules (Safe Harbor for Small Taxpayers, Routine Maintenance Safe Harbor, De Minimis Safe Harbor can be used in conjunction with each other? My understanding is that for SHST you make an election on a PER PROPERTY basis, and this election can change from year to year, property to property. In other words, you may use SHST on property A and C for year 2014, and switch to property B and C for year 2015. Is this correct? There is no need to elect the Routine Maintenance Safe Harbor, but you do need to elect the De Minimis Safe Harbor but unlike the SHST, this De Minimis safe harbor applies to ALL your properties. Correct?
(2) SHST Ceiling
Besides the $1 million dollar building limit, there is a $10000 or 2% of the basis whichever is less ceiling. So if a property's basis is $300,000 then 2% is $6000. That would be the total ceiling for deducting your aggregate repair/maintenance/improvement expenses. plus the routine maintenance safe harbor amount will count against the SHST ceiling. This means if you spent $3000 on routine maintenance items (HVAC coil cleaning, freon charging, filter replacement, tree pruning and trimming, lawn mowing...), but $4000 on other miscellaneous repairs and improvement, your total amount is $7000 which exceeds the $6000 for SHST. So you can still claim the $3000 under the routine maintenance safe harbor but you cannot elect SHST for that property, instead you need to classify every item of that remaining $4000 and test each item's effect on it's respective UOP. Correct?
If that is the case, does the De Minimis Safe Harbor work the same way? If you have ten repair of maintenance items at $400 each, totally $4000, all of those being under $500 can be claimed under the De Minimis Safe Harbor. However, you also put in a real expensive whole house tankless water heater which including new electrical wiring, new copper lines, new manifold, permits, gas venting etc...cost $3000. Now the total is $7000, exceeding the $6000 SHST ceiling, so you could not elect SHST for this property, however, if the water heater cost less, at $1999, your total is $5999, so you could elect both De Minimis Safe Harbor and SHST. Is this correct? Or may be the items that fall under the De Minimis Safe Harbor rules does NOT count against the SHST ceiling? Which seems unlikely but I thought I would ask.
(3) De Minimis Safe Harbor is per invoice or per item?
Is the $500 limit on the De Minimis Safe Harbor based on a per invoice or per item basis? If I had hired a landscape company to come and mow my lawn (maintenance), prune one tree (maintenance) and plant some shrubs (improvement) and the invoice is $750 then I cannot use the De Minimis Safe Harbor as the invoice is in excess of $500 but if I had asked for an itemized breakdown of individual items on that single invoice, I could as long as each item is under $500? That seems to be the case if I look at the IRS publication stating "Under §1.263(a)-1(f)(1)(ii)(D), a taxpayer without an AFS may elect to apply the de minimis safe harbor if,among other things, the amount paid for the property subject to the de minimis safe harbor does not exceed $500 per invoice (or per item as substantiated by the invoice) or other amount as identified in published guidance issued by the Treasury Department and the IRS." With regards to this, would it be to landlord's advantage to always request quotes and invoices to the lowest level of granularity?
One related question would be HOA fees. If you pay say $300 a month to an HOA, and the HOA fee covers the building's hazard insurance, flood insurance, lawn maintenance, laundry room operating cost, water bills, and an assortment of repairs and improvements, and the rest goes to HOA funds, how would you handle that? Do you need to dig into the HOA's finances and find out how much went into insurance, how much went into utilities, repairs, maintenance, improvements, then spread that across the number of owners in order to figure out how much of your $300 per month went where, and roll each items back into their respective "slots" to see if they can be counted towards the three safe harbors? That seems overly complicated...I am thinking there is an easier way?
(4) De Minimis Safe Harbor is for ALL PROPERTIES?
If I elect the De Minimis Safe Harbor and do my accounting that way, and I acquired a new property in 2014 but hasn't yet put it into service due to extensive repairs and remediation necessary, does it mean I could expense some repair and improvement expenses because the De Minimis Safe Harbor is in effect for that property even though it hasn't been put into service? Pretty sure the answer is no and this is just my wishful thinking. I would need to capitalize everything correct?
Now, I did notice somewhere there is a reference to new regulations on capitalizing acquisition costs. However there is an exception "Taxpayers are not required to capitalize investigatory costs that occurred in a transaction’s infancy or so-called “pre-decisional” costs." Anyone familiar with this exception? Transaction's infancy? Does this mean costs incurred while you do your due diligence may be expenses? Such as inspection, mold testing, HOA document fee to read through the bylaws, boundary survey, wind mitigation reports, loan application and credit report fees etc...are those exceptions to the acquisition costs or no? If so where do they go in Schedule E?
(5) IRS request for comments on the $500 limit
"The Treasury Department and the IRS request written comments by April 21, 2015 on whether it is appropriate to increase the de minimis safe harbor limit provided in §1.263(a)1(f)(1)(ii)(D) for a taxpayer without an AFS to an amount greater than $500, and, if so, what amount should be used and what is the justification for that amount. Comments should refer to Rev. Proc. 2015-20, and should be submitted to:Internal Revenue Service,Attn: CC:PA:LPD:PR(Rev. Proc. 2015-20), Room 5203, P. O. Box 7604, Ben Franklin Station, Washington, DC 20044. Comments also may be hand delivered Monday through Friday between the hours of 8 am and 4 pm to CC:PA:LPD:PR (Rev. Proc. 2015-20) Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W. Washington, D.C. Alternatively, comments may be submitted electronically directly to the IRS via the following e-mail address: [email protected]". It's one day past April 21 but it sure would be nice to request to bump that number up from $500 to a higher number. I sent in my comment to that email address.
Sorry this is kind of long, thanks in advance to any comments to my questions.