Annual Elections: What is an "Item" versus an "Improvement". De Minimis Safe Harbor versus the $200 rule?

Yes, furniture, fixtures, equipment, and package lockers are all items. Items under $200 are usually expensed, but you can depreciate them instead, if you want to stretch out the deduction. 

The question that references a $2500 limit is based on the De Minimis Safe Harbor. This safe harbor election allows you to deduct expenses up to $2,500 per invoice. this applies to both items and improvements.

These questions are designed to help you figure out whether or not you need to depreciate an item or not. They also provide a "safe harbor". That means if you are audited the IRS will not question whether you should have depreciated the expense. 

Thank you Julie S.

Do not understand why TT specifies ITEMS in regards to the $2,500 or less statement.  And why it specifies IMPROVEMENTS later on, when it seems to be getting into the area of determining if you can expense versus depreciate using the Safe Harbor for Small Taxpayers for our rental property investments.  Why doesn't TT just ask if we have any ITEMS and/or IMPROVEMENTS $2,500 or less to lessen the confusion?  TT ran out of space?

Seems, based on your response, the decision process goes as follows for our rental property investments:

- If $2,500 or less, De Minimis Safe Harbor applies for BOTH ITEMS & IMPROVEMENTS

- If ITEM or IMPROVEMENT is more than $2,500, have to depreciate unless we and our rental meet the requirements for using Safe Harbor for Small Taxpayers

Thanks again!

The requirements are different for personal property vs real property. It's one of those tax issues. It's important to separate the personal property (anything that is not real property in tax terms) from real property.  In the tax law there are only two kinds of property.  

1. Real Property (anything that is land, buildings and structural components)
2. Personal Property - Two Types
   1. Tangible - anything you can see, feel or touch
   2. Intangible - in and of itself it has no value but represents a value (a dollar bill or a stock certificate, etc)

The reason is simple.  Real property has special tax treatment rules and personal property income is taxed at the ordinary or regular tax rate.

Improvements Election

This election is an option you can take each year that lets you write off some building improvements as expenses instead of assets.

Here are the rules you need to meet to take this election:

• Your gross receipts, including all your other income, are $10,000,000 or less.
• Your eligible building has an unadjusted basis of $1,000,000 or less.
• 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

This election for building improvements is called the Safe Harbor Election for Small Taxpayers. If you decide to take this option, a form called Safe Harbor Election for Small Taxpayers will show up in your tax return. This election will apply to all your businesses, rental properties or farms. (IRS Tangible Property FAQs)

1. When you come to the screen, Did you buy any items that each cost $2,500 or less in 2021? mark the Yes button and click Continue. 
2. On the screen Let's see if you qualify to deduct these items as expenses, mark both of the Yes buttons and click Continue.
3. On the Now, let's review each item you bought screen, mark whether all your new assets cost $2500 or less. 
4. If you mark that every item cost $2,500 or less, you will be brought to the Rental Summary screen.  You have elected the De Minimis Safe Harbor provision. 
5. If you mark that some cost above $2,500, you will be asked Did you make improvements to rental in 2021?
6. If you say Yes, you will be taken through the screens for the Improvements election.
7. If you say No, you will see the screen Do you have any items that aren't covered by your elections?  Proceed through the screens to enter these assets. 
8. On the Rental Summary screen go to the Expenses section and click on the Start/Update box. 
9. Continue to the Any Other Expenses? screen and enter the description and amount paid for the assets. Click Continue when finished
10. Continue to complete your entries

Personal Property: (As explained by our awesome Tax Expert @JulieS)

You expense the furniture in the year they are placed in service, based on your comments that will be 2021.  The rental unit is rented or available for rent and advertised as such.

De Minimis Safe Harbor Election

This election for items $2,500 or less is called the De Minimis Safe Harbor Election. This election is an option you can take each year that lets you write off/deduct items $2,500 or less as expenses instead of assets. Expenses typically reduce your income by a larger amount than depreciating an asset over multiple years does. This means you could get a bigger refund.

If you decide to take this option, a form called De Minimis Safe Harbor Election will show up in your tax return. This election will apply to all your businesses, rental properties or farms.

Here are the rules you need to meet to take this election:

• You don't have an applicable financial statement (most people don't).
• You have a consistent process for how you record expenses and assets.
• You record these items as expenses on your books/records.
• The cost of each item as shown on your receipt is $2,500 or less.
• Rental Property select Edit > Other expenses > Other Miscellaneous Expenses
• Enter Description (Safe Harbor ...) and amount (not entered as assets under this election)

Note:  Because you are under the $2,500 threshold, you are not required to used section 179.  You can list these expenses under Miscellaneous.  If the amount was over 2,500, then you would enter these as assets and then would be able to choose the 179 option.

• Maintain a complete record with your tax return should you need to verify these items at a later time.

Thank you DianeW777 for your comprehensive and detailed response.  Here are a couple of followup comments and questions:

-  If I am reading the Safe Harbor for Small Taxpayers correctly, there is no $2,500 limit for a building improvement to be expensed under the Safe Harbor for Small Taxpayers as long as we meet the three rules, including the last one about the total amount of repairs and improvements not exceeding the lesser of $10,000 or 2% of the unadjusted basis of the property.  Correct?

- If a property does not meet the De Minimis Safe Harbor Election requirements, and an improvement is $200 or less, is it better to expense the improvement under the Safe Harbor for Small Taxpayers (the property meets the requirements) or expense it because it is $200 or less?

- In Turbo Tax, Turbo Tax uses the terms "Item" and "Improvement".  From your and JulieS's responses, am deducing that Item = Personal Property and Improvement = an improvement to Real Property.  Am I correct?

Thanks, Think57

Understand that the safe harbor limits are not base on your share. It's based on the price of the invoiced item. So if the price of the invoiced item is more than $2500, it doesn't matter if your share of that is less than $2500. It doesn't qualify for safe harbor under those specific rules. (It may under other rules.)

Thanks Carl for your response.  Just to be clear, you are talking about the De Minimis Safe Harbor Election?

Yes. It says that most item purchased for less than $2,500 can be expensed. That's based on the purchased price of the item, and not a partner's share of that purchase price.

In the case of a 1065 return I would expect a qualifying item to be expensed on the 1065 - not on one's personal 1040 return via the K-1.

Looking back at the first post that started this thread, what "$200 rule" are you referring to? Never heard of any such amount when it comes to the Deminimis Safe Harbor election. Maybe it's something pertaining to partnerships or some other type of business structure?

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@Carl wrote:

Looking back at the first post that started this thread, what "$200 rule" are you referring to?

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The "rule" was (is) that materials and supplies costing $200 or less can be expensed (deducted) rather than capitalized. 

See https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations

Thanks Carl.  Turbo Tax provides that option when you add an asset.  Was just wondering where it came from.  Perused the document you provided the link to, however, did not see the $200.  Will trust Turbo Tax is correct.

What is included in the definition of materials and supplies?

Materials and supplies are tangible, non-inventory property used and consumed in your operations including:

• Acquired components – Costs of components acquired to maintain, repair, or improve tangible property owned, leased, or serviced by you and that's not acquired as part of a larger item of tangible property; or
• Consumables – Costs of fuel, lubricants, water, and similar items that are reasonably expected to be consumed in 12 months or less, beginning when used in operations; or
• 12 month property – Costs of tangible property that has an economic useful life of 12 months or less, beginning when the property is used or consumed in your operations; or
• $200 property – Costs of tangible property that has an acquisition cost or production cost of $200 or less.

The property need only fit into one of the above categories to qualify as a material or supply.

I have a follow-up question regarding purchased items that fit in the last bullet category.

• $200 property – Costs of tangible property that has an acquisition cost or production cost of $200 or less.

For my rental property, I have purchased various items (e.g. Pots and Pans, Glasses, Alarm Clocks, Coffee Maker, Blu-Ray players, DVDs, Board Games, used furniture) that each cost less than $200. So, they all could be qualify as a supply?

If so, when entering my Rental property common expenses for the tax year, would I just include the cost of the above items in the Supply expense total? Or should I list them as separate items on the Any Miscellaneous Expenses screen?

Thanks!

@Michael_NC 

Yes, those items would qualify as supplies that you could simply expense.

You can enter the total as "supplies" or separate them out as miscellaneous expenses (either way just make sure you retain your receipts).

Thanks for the confirmation.

Is there any benefit in listing the items as miscellaneous expense?

It would seem to be easier to enter the total as part of the Supplies.

Its my first year using Turbo Tax to expense a Rental property so trying to be diligent and correct in how I'm handling various expenses.

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@Michael_NC wrote:

It would seem to be easier to enter the total as part of the Supplies.

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It is just my opinion, but that approach appears to be the better one and less of a hassle (it is the one I use and have been using for years without any issues).

I have the same question.  However, when reading through the answers, I'm concerned the answers miss 2 points.  1).  DST investments are passive, so are not a "business", and 2) taxpayers usually own a small % of the DST.  

Let's use a 1% ownership as an example:  I understood the $2500 limit is per invoice.  So if the DST statement shows $87, that means the item was $8,700.  So, does the $2500 apply to the 1% of $87 or the invoice amount for the DST of $8,700. 

Since DST investments are passive, can the $200 limit apply since the investment is NOT considered a business ?

I need some clarification on this also.  I have a rental and share ownership with another family member and we each file our own return.   Income and expenses are shared equally. and reported on the Schedule E.   This year my actual part of the improvements/maintenance/repair expenses are under the 2% of the Unadjusted basis of the building, and I would like to use the small harbor for small taxpayers election   I would greatly benefit with the deduction this year, he prefers to capitalize his portion.  Can I do this?

I have searched and searched and found no real definitive answer anywhere in the IRS rules.  

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@tol wrote:

So, does the $2500 apply to the 1% of $87 or the invoice amount for the DST of $8,700. 

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I believe that would be the invoice amount, regardless.

Thus, in that case the $8,700 is far over the limit.

Hello TOL.  I find these tax terms and definitions confusing, as the tax world has its own semantics and definitions.  I look as a DST investment as a "passive investment in a business".  It is a business in that we have to fill out a Schedule E for.  And according to the tax rules, a DST investment is a passive activity. 

I only use the De Minimis Safe Harbor election when the income statement from the DST sponsor lists out expenses as meeting the De Minimis Safe Harbor criteria.

I expense items and improvements $200 or less because Turbo Tax offers that as an option.  Turbo Tax knows that this Schedule E activity is a passive activity, so trusting that Turbo Tax is correctly offering this option versus depreciating the item or improvement.

To keep things simple, for items and improvements where our portion is greater than $200 per the financials from the DST sponsor, am not using the Section 179 or the Special Depreciation Allowance options, even though Turbo Tax offers them as options versus depreciating the asset.  Seems things get tricky when the passive activity has a loss and the expensing of the asset using Section 179 or Special Depreciation Allowance options gets caught up in the passive activity limitations tax rules and carry-forward of passive activity loss rules.