Requesting help in understanding safe harbor applications

3 Replies

Hi BP,

I recently incurred significant expenses for the exterior of one of my properties, and am requesting your assistance in understanding what I may be able to deduct in the current year.  I would classify each of the below items as either a betterment, adaptation, or restoration, so it would fall under the 'improvements' side of the 'repairs vs improvements' argument.  However, I am hoping to gain clarification as to whether any of these expenses (improvements) would be currently deductible under any of the safe harbor elections.

Here are the facts:

  • The basis of the property is $115,000, and is currently in service (tenants are in the property)
  • Separately invoiced items:

1. Replace warped boards on deck and house= $350

2. Remove/replace gutters and downspouts= $1100

3. Remove/replace exterior doors= $2100

4. Remove/replace garage door= $1000

5. Remove/replace all windows= $2500

6. Paint entire exterior of house= $2400

7. New stove= $400

TOTAL= $8460

  • Here is my logic:

1. safe harbor for small tax payers. I don't think that it falls under the safe harbor for small tax payers, since it exceeds the annual expense limit (2% of $115,000= $2300), and because I must count everything spent during the year, if I exceed the $2300 (which I do), I cannot count any of it towards this safe harbor.  In this case, $8460 exceeds $2300, so it renders me unable to use this safe harbor.

2. De minimis safe harbor.  The only item that would be considered personal property is the $400 stove.  Since the $400 stove is less than $2500, then I may elect to use this safe harbor and deduct the cost of the stove.  Can I count any of the other items under the de minimis safe harbor election? I don't think so.

3. Routine maintenance Safe Harbor. Would not fall into this, as they were betterments and restorations.

Based on the above, must I capitalize everything other than the new stove?

Your help is very much appreciated!

You do not have to worry about the Safe harbor for Small Taxpayer or Routine maintenance Safe harbor.  You can expense these under de minimus safe harbor' 

Note: I am ignoring $5000 de minimis safe harbor amount that does not apply to you. 

 The safe harbor applies to amounts paid during the tax year to acquire or produce what the regs call a “unit of property” (UOP), you must meet these requirements:

  • (1) at the beginning of the tax year, the taxpayer has written accounting procedures treating as an expense for non-tax purposes amounts paid for property costing less than a specified dollar amount (which will be 2500 for you), or with an economic useful life of 12 months or less;.
  • (2) the taxpayer treats the amount paid for the property as an expense on its books and records in accordance with its accounting procedures. ( do this on your bookkeeping software or whatever you utilize)
  • (3) the amount paid for the UOP doesn't exceed $2,500. as substantiated by the invoice
  • Note: The cost for the Unit of Property includes l additional costs (for example, delivery fees, installation services, or similar costs) if these additional costs are included on the same invoice with the tangible property.

Eg:

A purchases 100 printers at $500 each for a total cost of $500,000 as indicated by the invoice. Assume that each printer is a unit of property ). A has accounting procedures in place at the beginning of Year to expense amounts paid for property costing less than $2500, and A treats the amounts paid for the printers as an expense on its books and records. The amounts paid for the printers meet the requirements for the de minimis safe harbor.

Thank you @Ashish Acharya !

I was getting confused, because in some sources I saw 'tangible personal property' and then in others just 'tangible property', so the 'personal property' was throwing me off.

I have a follow up question: What exactly do they mean by 'producing' a UOP?

@Mike G.  UOP can be both non-buildings and buildings. 

The UOP for assets other than buildings generally consists of all the components that are functionally interdependent (i.e., where placing in service of one component is dependent on the placing in service of other component(s). example, Printer and wires that are needed for the printer to function. 

The UOP for a building generally is the building and its structural components.

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