What to do when you fail the de minimis safe harbor election test

Question

Good morning everyone!

I think I have a unique situation in that I do not qualify for the de minimis safe harbor election test. Now the cost of each of my items is below $2,500, however I don't believe I meet the other rules to take the election.

• Your gross receipts, including all your other income, are $10,000,000 or less.

I do meet this one!

• Your eligible building has an unadjusted basis of $1,000,000 or less.

I meet this one as well!

• The cost of all repairs, maintenance and improvements is less than or equal to the smallest of these limits: 2% of the unadjusted basis of your building or$10,000
• 2% of the unadjusted basis of your building or
• $10,000

• 2% of the unadjusted basis of your building or
• $10,000

I do not believe I meet this one. My total for repairs, maintenance and improvements comes to well over $11,000...it wasn't a great year for us. It's also well over my unadjusted basis so that is moot.

1) My question is can I now not take the safe harbor election for any of these items and must I depreciate everything over 27.5 years?

2) Or can I take it for just up to the $10,000 limit and depreciate the rest?

3) Or do I expense the maintenance and repairs, which are roughly $6,000 and depreciate the $5,000 in improvements?

Please let me know if I missed any details or can provide anything else to help me solve this problem.

Thanks!

Craig

Eamonn McElroy · Answer

@Craig Poskus

You're conflating two different expensing safe harbors.

What you're describing above is the safe harbor for small taxpayers (SHST), not the de minimis safe harbor (DMSH).

There is no gross receipts limit or unadjusted basis limit regarding the DMSH.

Note that the $2,500 limit under the DMSH is on a "unit of property" basis, not an "individual line item on an invoice" basis.

If that seems complicated it's because it is. The tangible property regs are one of the most complex areas of tax law. You'll want to spend a great deal of time educating yourself in this area, or choose to bring a rockstar tax CPA/EA on board your team.

Craig Poskus · Answer

Thank you for the explanation Eamonn! So it sounds like I can in fact expense these items that cost $2,500 or less since I meet all three of the criteria you listed.

Craig

Eamonn McElroy · Answer

@Craig Poskus

The DMSH is more of a book conformity election than an expensing election. Units of property that cost $2,500 or less can be expensed immediately for tax if (1) they are also expensed for book accounting, (2) an expensing policy is on file with the company/business, and (3) an annual DMSH election is made before the due date (including extensions) of the tax return.

The SHST is an expensing election that applies to real property under very specific circumstances.

Craig Poskus · Answer

Oh fantastic. Would it be possible to get a quick explanation of how I am confusing the two?

Thanks!

Craig

Basit Siddiqi · Answer

@Craig Poskus@Eamonn McElroy hit it on the nail with his analysis. You are looking at two different tests and you technically only need to satisfy one of the tests to be eligible to expense in the current year.

What to do when you fail the de minimis safe harbor election test

What to do when you fail the de minimis safe harbor election test

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