If you operate a business, you may want to take advantage of an important tax planning opportunity known as the De Minimis Safe Harbor Election when filing your tax return. This election allows you, the taxpayer, to set a capitalization threshold so that all amounts that fall below that number are not capitalized for federal tax reporting purposes. This is particularly advantageous for taxpayers who tend to capitalize large amounts of “low dollar” fixed assets including items such as office and computer equipment, off-the-shelf software, and office furniture, etc.
For entities with capital expenditures, the De Minimis Safe Harbor Election allows for a deduction of $2,500 (for those preparing financial statements) or $5,000 (for those with audited financial statements) to be applied to each individual item. In the case that a vendor invoice exceeds these limits, a taxpayer is able to apply the De Minimis Safe Harbor Election on an individual item basis if the invoice provides such detail.
In order to elect to take advantage of the De Minimis Safe Harbor Election, you’ll need to meet various criteria. Each year that you choose to employ the election, you will be required to include this election on your tax return. A taxpayer is required to have a written internal capitalization policy in place at the start of the tax year which clearly details what the minimum capitalization threshold amount is and how assets will be treated in relation to that threshold. This policy should be reviewed and updated, as necessary, each year that you plan to participate in claiming the election on your return.
While the Tax Cuts and Jobs Act (TCJA) has, in many ways, minimized the near-term utility of the De Minimis Safe Harbor Election, there are still benefits to maintaining a capitalization policy that mirrors the Safe Harbor thresholds. The TCJA has increased bonus depreciation to 100% for assets purchased between September 28, 2017 and December 31, 2022. Starting in 2023, the 100% bonus will be reduced by 20% each year until it is fully eliminated in 2027. For those taxpayers maintaining books and records that are not on a tax basis, there will be less administrative time spent tracking and computing depreciation. Your tax preparer will appreciate the hours saved sifting through fixed asset schedules and identifying assets to expense that are below the thresholds, which may translate to lower fees!
If you wish to discuss potential tax planning opportunities using the De Minimis Safe Harbor Election and the benefits associated or if you need assistance in updating your written internal capitalization policy to be in compliance, please contact your Untracht Early advisor.