$500 safe harbor increased to $2,500 for taxpayers
Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votesGood news everyone, the $500 de minimis safe harbor limit was increased to $2,500 for taxpayers who place property in service, that are NOT required to produce an audited financial statement(applicable finance statement).
Effective for January 1st 2016 they are adjusting audit procedures to ignore items below this threshold provided provided you have a receipt.
This means you will not have to depreciable items below this threshold as long as you elect that safe harbor.
Of course it was released this morning, after I prepared for my presentation this evening.
This represents HUGE $$$ savings and time savings.
IRS Notice Notice 2015-82This Notice is effective for costs incurred during taxable years beginning on or after January 1, 2016.
@Daria B. @Steven Hamilton II we cannot take deductions for improvements simply because they are less than $2,500. A bathroom, kitchen, or basement remodel will not qualify for the De Minimis election as a whole, rather individual components and personal property will qualify for the election.
As @Susan Robb correctly stated, property that qualifies for De Minimis cannot be considered an improvement to the unit of property (UOP) which generally limits the deduction to tangible personal property and components of tangible property (read: spare parts).
For example, carpet is generally considered personal property and may qualify for the election. However, laminate or wood glued to the flooring is not personal property but rather an improvement to the building structure.
The best thing for anyone to do prior to making this election is to discuss with a qualified professional.
The following code supports Susan's and my remarks:
§ 1.263(a)-1(f)(1)(i) Except as otherwise provided in paragraph (f)(2) of this section, a taxpayer electing to apply the de minimis safe harbor under this paragraph (f) may not capitalize under § 1.263(a)-2(d)(1) or § 1.263(a)-3(d) any amount paid in the taxable year for the acquisition or production of a unit of tangible property nor treat as a material or supply under § 1.162-3(a) any amount paid in the taxable year for tangible property if the amount specified under this paragraph (f)(1) meets the requirements of paragraph (f)(1)(i) or (f)(1)(ii) of this section. But see section 263A and the regulations under section 263A, which require taxpayers to capitalize the direct and allocable indirect costs of property produced by the taxpayer (for example, property improved by the taxpayer) and property acquired for resale.
§ 1.263A-2(a)(1)(i) In general. For purposes of section 263A, produce includes the following: construct, build, install, manufacture, develop, improve, create, raise, or grow.
So, that was far reaching and the example of the washer and dryer was more appropriate as an expense. The remodel then looks to be, because it adds to the basis of the property and is an improvement, is depreciated. :( I'm so glad I have a CPA. :)
Thanks, Steve. This is great news for those that do their own taxes like me (or those that do them for others like you)... And it makes sense, as many everyday items for a small scale landlord like me are above $500 (common example: the stacked washer and dryers in most of my units are above $500, but are below $2,500)... The rule makes sense--not always the case with taxes I find--but glad to see the safe harbor go up and I hope it goes up more in future years....
Thanks, Steve. This is great news for those that do their own taxes like me (or those that do them for others like you)... And it makes sense, as many everyday items for a small scale landlord like me are above $500 (common example: the stacked washer and dryers in most of my units are above $500, but are below $2,500)... The rule makes sense--not always the case with taxes I find--but glad to see the safe harbor go up and I hope it goes up more in future years....
It is wonderful for situations like that now. A couple rooms of carpet can now be less than that and we don't have to carry it for 5 years.
Just to add to this - even though it's effective Jan 1, 2016, the IRS won't challenge the use of the new $2500 threshold for tax years ending before 2016 as long as the rest of the 263(a)-1(f)(1)(ii) rules are followed.
Does this also mean if a kitchen or batch remodel was done under $2500 it also applies? Or are those items still depreciable because it adds value to the existing basis of the property?
We would expense those costs. Keep in mind appliances would be listed separate as well as counters etc. As they are individual items.
Okay Professors,
Please pull out your crayons and explain to the class (okay... Me) what this means to someone such as myself just starting out.
I thank you in advance.
Does this also mean if a kitchen or batch remodel was done under $2500 it also applies? Or are those items still depreciable because it adds value to the existing basis of the property?
We would expense those costs. Keep in mind appliances would be listed separate as well as counters etc. As they are individual items.
Really? Expense? I like the sound of that. Although it would have to be a small kitchen to get away with under $2500 rehab/remodel but far and away I suspect that can be done with mid-grade still good quality appliances and cabinets in a small footprint.
Just when I had my mind set on the $500 limit and rules, the IRS changes them, but for the better this time.
Rule for me then is keeping in mind the $2500 threshold that if in-bulk it's over that amount then it has to be depreciated. Correct?
Okay Professors,
Please pull out your crayons and explain to the class (okay... Me) what this means to someone such as myself just starting out.
I thank you in advance.
Expenses up to $2,500 are deductible in the current year unless they are part of a larger component such as a basement remodel.
We would depreciate flooring separate(if under 2,500 we would deduct it in the current year).
But lets say you finish a basement involving framing, drywall, paint, flooring, drop ceiling, etc.
Flooring would be handled as listed above. The other items are all part of one item,(the walls and ceiling) therefore they would be combined and depreciated assuming your cost was above $2,500).
Notice 2015-82 released yesterday by the IRS does increase the threshold for tangible personal property for small businesses that meet certain criteria. However, you need to be cautious when it comes to real estate as there is much more to the IRS Regulations. The rules are much more complicated and involved in this area.
For certain small taxpayers, improvements are not required to be capitalized (you can expense immediately) if the total amounts paid for repairs, maintenance, and improvement during the year do not exceed the lesser of $10,000 or two percent of the "unadjusted basis" (basically the cost) of the building. This means the $10,000 is the total paid for all such expenditures. Also, the unadjusted basis of the building must be less than $1 million for a taxpayer to be able to use this safe harbor.
One needs to make sure that any item purchased is considered personal property and not part (a component such as HVAC) of a building.
Also, at a minimum you need to attach to each tax return filed for years 2014 and later (every year) two elections: 1) De Minimis Safe Harbor Election and 2) Election by Small Taxpayer to Deduct Building Improvements.
If you are not aware of the specific rules related to real property, I would suggest that further research is in order. However, the new $2,500 threshold is good news for most small businesses who regularly purchase small equipment, furniture, etc. Just remember that you need to be sure that the items you are expensing are truly "tangible personal property" and not considered building improvements as the rules are different.
@Daria B. @Steven Hamilton II we cannot take deductions for improvements simply because they are less than $2,500. A bathroom, kitchen, or basement remodel will not qualify for the De Minimis election as a whole, rather individual components and personal property will qualify for the election.
As @Susan Robb correctly stated, property that qualifies for De Minimis cannot be considered an improvement to the unit of property (UOP) which generally limits the deduction to tangible personal property and components of tangible property (read: spare parts).
For example, carpet is generally considered personal property and may qualify for the election. However, laminate or wood glued to the flooring is not personal property but rather an improvement to the building structure.
The best thing for anyone to do prior to making this election is to discuss with a qualified professional.
The following code supports Susan's and my remarks:
§ 1.263(a)-1(f)(1)(i) Except as otherwise provided in paragraph (f)(2) of this section, a taxpayer electing to apply the de minimis safe harbor under this paragraph (f) may not capitalize under § 1.263(a)-2(d)(1) or § 1.263(a)-3(d) any amount paid in the taxable year for the acquisition or production of a unit of tangible property nor treat as a material or supply under § 1.162-3(a) any amount paid in the taxable year for tangible property if the amount specified under this paragraph (f)(1) meets the requirements of paragraph (f)(1)(i) or (f)(1)(ii) of this section. But see section 263A and the regulations under section 263A, which require taxpayers to capitalize the direct and allocable indirect costs of property produced by the taxpayer (for example, property improved by the taxpayer) and property acquired for resale.
§ 1.263A-2(a)(1)(i) In general. For purposes of section 263A, produce includes the following: construct, build, install, manufacture, develop, improve, create, raise, or grow.
@Daria B. @Steven Hamilton II we cannot take deductions for improvements simply because they are less than $2,500. A bathroom, kitchen, or basement remodel will not qualify for the De Minimis election as a whole, rather individual components and personal property will qualify for the election.
As @Susan Robb correctly stated, property that qualifies for De Minimis cannot be considered an improvement to the unit of property (UOP) which generally limits the deduction to tangible personal property and components of tangible property (read: spare parts).
For example, carpet is generally considered personal property and may qualify for the election. However, laminate or wood glued to the flooring is not personal property but rather an improvement to the building structure.
The best thing for anyone to do prior to making this election is to discuss with a qualified professional.
The following code supports Susan's and my remarks:
§ 1.263(a)-1(f)(1)(i) Except as otherwise provided in paragraph (f)(2) of this section, a taxpayer electing to apply the de minimis safe harbor under this paragraph (f) may not capitalize under § 1.263(a)-2(d)(1) or § 1.263(a)-3(d) any amount paid in the taxable year for the acquisition or production of a unit of tangible property nor treat as a material or supply under § 1.162-3(a) any amount paid in the taxable year for tangible property if the amount specified under this paragraph (f)(1) meets the requirements of paragraph (f)(1)(i) or (f)(1)(ii) of this section. But see section 263A and the regulations under section 263A, which require taxpayers to capitalize the direct and allocable indirect costs of property produced by the taxpayer (for example, property improved by the taxpayer) and property acquired for resale.
§ 1.263A-2(a)(1)(i) In general. For purposes of section 263A, produce includes the following: construct, build, install, manufacture, develop, improve, create, raise, or grow.
So, that was far reaching and the example of the washer and dryer was more appropriate as an expense. The remodel then looks to be, because it adds to the basis of the property and is an improvement, is depreciated. :( I'm so glad I have a CPA. :)
Improvements COULD be expensed but the devil is in the details...whether the expenditure qualifies: total basis of the building, total expenditures during the year for repairs, maintenance AND improvements, etc. It's always best to consult with an expert in tax law.
@Susan Robb I believe you mean that improvements can be expensed under the safe harbor for small taxpayers or the routine maintenance safe harbor.
Improvements, defined as property produced by the taxpayer in Section 263A-2, are not eligible for the De Minimis safe harbor.
I always thought it was stupid to depreciate an $800 hot water heater. And honestly in an audit much harder for IRS to establish basis when you have all these minor transactions effecting it. Finally some sanity
@Susan Robb,would you please clarify whether an HVAC component or system can be expensed using the less than $10,000 or 2% of the adjusted basis (whichever is less) rule? Is there an IRS publication regarding this?
For example, carpet is generally considered personal property and may qualify for the election. However, laminate or wood glued to the flooring is not personal property but rather an improvement to the building structure.
What about something like Allure flooring? Would it be treated like carpet since it is a floating floor and not permanently attached to the structure?
For example, carpet is generally considered personal property and may qualify for the election. However, laminate or wood glued to the flooring is not personal property but rather an improvement to the building structure.
What about something like Allure flooring? Would it be treated like carpet since it is a floating floor and not permanently attached to the structure?
I think earlier in the posts it was stated that carpet could be expensed while flooring that was glue down or hardwood had to be depreciated.
For example, carpet is generally considered personal property and may qualify for the election. However, laminate or wood glued to the flooring is not personal property but rather an improvement to the building structure.
What about something like Allure flooring? Would it be treated like carpet since it is a floating floor and not permanently attached to the structure?
I think earlier in the posts it was stated that carpet could be expensed while flooring that was glue down or hardwood had to be depreciated.
Daria, you're correct. Allure is a vinyl flooring that is not glued down though. So, I guess my question is, how could one classify it? More as a carpet since it's not glued down or more like a vinyl floor since it is a vinyl floor, but it's not attached to the property because it's a floating installation? Does that make sense?
For example, carpet is generally considered personal property and may qualify for the election. However, laminate or wood glued to the flooring is not personal property but rather an improvement to the building structure.
What about something like Allure flooring? Would it be treated like carpet since it is a floating floor and not permanently attached to the structure?
I think earlier in the posts it was stated that carpet could be expensed while flooring that was glue down or hardwood had to be depreciated.
Daria, you're correct. Allure is a vinyl flooring that is not glued down though. So, I guess my question is, how could one classify it? More as a carpet since it's not glued down or more like a vinyl floor since it is a vinyl floor, but it's not attached to the property because it's a floating installation? Does that make sense?
Begs the question of the hardwood flooring that also can be floating?!? I looked at the hardwood as being classified as all one "type" not distinguishable between float or glue. So, the Allure that is a floating, and can be glue down as well-correct?, might be classified by the IRS as a "type" like "hard surface" rather than "soft" like carpet. I've not found anything where they have any definitions on this. Brandon any thoughts?
any thoughts on this?
For example, carpet is generally considered personal property and may qualify for the election. However, laminate or wood glued to the flooring is not personal property but rather an improvement to the building structure.
What about something like Allure flooring? Would it be treated like carpet since it is a floating floor and not permanently attached to the structure?
I think earlier in the posts it was stated that carpet could be expensed while flooring that was glue down or hardwood had to be depreciated.
Daria, you're correct. Allure is a vinyl flooring that is not glued down though. So, I guess my question is, how could one classify it? More as a carpet since it's not glued down or more like a vinyl floor since it is a vinyl floor, but it's not attached to the property because it's a floating installation? Does that make sense?
Begs the question of the hardwood flooring that also can be floating?!? I looked at the hardwood as being classified as all one "type" not distinguishable between float or glue. So, the Allure that is a floating, and can be glue down as well-correct?, might be classified by the IRS as a "type" like "hard surface" rather than "soft" like carpet. I've not found anything where they have any definitions on this. Brandon any thoughts?
Floating floors are considered personal property, same as carpet. Hard vs soft isn't a factor. Don't glue it to the structure as it will then become part of the building and depreciated over 27.5 years.
see answer above.
thanks @Brandon Hall
there should be book or cliff notes on owning rentals. :-) just kidding. it's a lot to consider for taxes more so than anything else in the business in my opinion.
That's exactly the answer I was hoping to hear. Thank you very much!
@Brandon Hall, I assume election out of 263A (under $25M taxpayer) gives more room to maneuver. Brushing up on this, hadn't looked at it in awhile.