Water heater, a personal property and therefore de minimis?

Question

Can I deduct a new water heater after the old one stopped working using the de minimis safe harbor? I have not found any reference for that.

Logan Allec · Answer

Yup, you got it, @Andreas W., the UOP is the plumbing system.

Andreas W. · Answer

@Logan Allec

Thanks for your explanation. It unfortunately makes sense in regard to the "new" treatment of the deduct - depreciate question. The water heater is part of the plumbing UOP, not the building UOP. A side effect of the new rules is that smaller ticket items suddenly need to be depreciated, which I view as an unintended consequence countering the spirit of those rules

Yes, I checked the safe harbor for small taxpayers. The water heater plus a few other repairs blow the 2% limit.

Logan Allec · Answer

@Andreas W., I am of the inclination that if you own a SFR rental, and you have to replace the water heater, you should capitalize it since the water heater is a significant portion of the building's plumbing system. However, if you own a building with 50 units in it, and you replace 10 water heaters throughout the year on an as-needed basis, then you may expense these as these 10 water heaters are not a significant portion of the building's plumbing system.

Have you looked into the safe harbor for small taxpayers, @Andreas W.?

Andreas W. · Answer

It seems there are differing opinions even in the accountant community, which is no surprise when regulations are broad. Until the IRS comes down with more specific guidance or a precedent, that probably won't change. I am just curious as to how this topic gets handled at audits. A water heater is a straight forward product that gets acquired and installed in rental units all the time.

Scott Davidson · Answer

@Lance Lvovsky Can you provide a reference on that? Not trying to challenge you, I just don't see where in the regs it specifies that de minimis can't be taken on real property.

"Under the final tangibles regulations, you may elect to apply a de minimis safe harbor to amounts paid to acquire or produce tangible property"

https://www.irs.gov/businesses/small-businesses-se...

The FAQ also references production of real or personal property.

My understanding of Tang. Prop. Regs. is that it's a multi step process, the first of which is to determine if the expense meets an exception to capitalization. The exceptions include the de minimis amount, which can be used on acquisition of any tangible property. I didn't think the UoP mattered for de minimis and was only examined after no exception to capitalization is met. The property is then viewed through the lens of its relation to the UoP to determine if it's a Betterment, Restoration, or Adaptation. Let me know. Thanks.

Lance Lvovsky · Answer

@Andreas W. The De Minimis Safe Harbor is not available on a Water Heater. The de minimis safe harbor applies to tangible personal property. The IRS views a water heater as part of the plumbing of the building, and as such, is not personal property.

Andreas W. · Answer

@Natalie Kolodij

Thank you for your reply. Do you know of any precedent where this is written up somehow? Before I created the topic, I spent time to find anything but stayed without success.

Natalie Kolodij · Answer

If you elect deminimus then yes you can- Have a written policy in place for this as well

Dave Toelkes · Answer

Water heater is a structural component, not personal property. You don't take the water heater with you when you move.

Water heater, a personal property and therefore de minimis?

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