De Minimus Safe Harbor

[pnored]

I am a landlord with 8 units and I am interesting in taking the DMSH for some of my normally depreciable items... I have read extensively on the subject  and felt good about the criteria and guidelines and understood everything fairly well until I started reading everyone's opinion on the subject here in the TT  threads.  One issue I am not understanding is why in the threads here about DMSH many say you can't take the election with improvements. I do not see that when I read the IRS information about the election. I dont think the word improvements is even used under the topic.  And then it is said that you should use the Safe Harbor Election for Small Taxpayers for improvements which I agree with but  I don't qualify for that election so that is a no go for me.  I did an extensive remodel on 3 units (over 100K) and will also have significant depreciation items that are over the $2500 limit. So what are examples that are a big no-no to take under the election that would be related to a remodel? What I am looking at for the election is the supplies i used for the improvements.... those are the low dollar receipts and there are many!!  Some examples would be tiles, faucets, bathroom vanities, lighting, window treatments, bathtubs, sinks, appliances.. anything you can think of that would go with a total remodel.  The labor for the improvements will be depreciated as it is near 80k and things like granite countertops, HVAC,...............   

Any polite/constructive comment or discussion on the above would be greatly appreciated and welcomed! 

Thanks

[DianeW777]

The deminimis safe harbor works in two different ways.  Once for personal property (assets that are not real estate) and then for capital improvements to real estate.  I will supply the information for both.

Personal Property:

If the amount is $2,500 or less then you may be able to directly expense this under miscellaneous deductions on the business or rental using the DeMinimis Safe Harbor rules.

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.

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)

[AmeliesUncle]

The 'improvement' (including cost of labor) is one item.  So if the entire 'improvement' is over $2500, it would need to be depreciated.

[pnored]

@DianeW777    Thank you for your reply.  I do not qualify for the DMSH for Small Taxpayers so I will be keeping the discussion to just DMSH.    If I am understanding correctly, the only part of my remodel (improvement)  that I can claim under the DMSH election would be the new appliances (personal property). All of the items that one typically thinks of for a remodel, like sinks, tubs, vanities, tiles, flooring, cabinet hardware, plumbing fixtures, light fixtures, etc  will need to be capitalized  anddepreciated along with the labor cost? 

I read on a  CPA websites where they  used this example for applying the DMSH:

For example, a taxpayer  replaces 100 windows in a property that has 150 windows at a cost of $2,000/window. This taxpayer, applying the facts and circumstances and considering the unit of property, has replaced a significant portion (100/150 or 66%) of the windows and would generally be required to capitalize the costs. If the taxpayer elected the de minimis safe harbor, it could deduct 200,000 immediately (100 x $2,000) and not have to capitalize the costs. 

I have also read very similar comments on other blogs and websites written by CPA's. (i try to make sure it is someone who should know tax law)   This seems to directly conflict the information you provided for the DMSH election because to me  windows are not personal property, they are an improvement. But they seem to be saying you can elect DMSH in their example.  

This is why I am so confused at this point. It seems to me some are interpreting the election one and others another way. 

[pnored]

@AmeliesUncle  Thank you! I appreciate your reply. However, when one talks about the DMSF election why do they talk about each item on an invoice can be line itemed as long as it is not over $2500. For example, if you buy 10 refrigerators for a remodel  you can use the DMSH election since this is personal property. And you can pull each refrigerator off and line item as long as each does not cost over $2500. This seems to contradict your statement.  Please let me know what you think. 

Thanks!

[birdieblue]

What can I do if the De Minimis Safe Harbor election isn’t in my return? I’m using turbo tax premium and I’m reporting income/expenses for a condo i rent out on schedule E. I’m pretty sure I said in the interview process I wanted to elect the safe harbor, but I can’t find that I the interview process when I go back to check. And when I previewed the return before filing, I saw there is no election in the return. I bought kitchen appliances for the condo for less than $2500 that qualify for the safe harbor if I make the election. But if there is no election form, I wouldn’t want the IRS to require me to capitalize if audited. How can I add the election before I e-file?

[MarilynG1]

Go back to the Rental Assets section and Edit. 

The first screen will ask if you want to review your Election choices, so choose Yes.

The next screen asks about your election (though it doesn't specifically say 'Safe Harbor').  Click the election link to learn more. 

Here's more discussion on the Safe Harbor Election.

@birdieblue 

[birdieblue]

I just don't see anything called "Election Choices".  Keep in mind I am not using a Turbo Tax business product, but TT Premium.  And I answered no to the question if I am a real estate professional, so that my rental income and expenses will be reported on Schedule E, not Schedule C.

[DianeW777]

Understood.  Below is the how the DeMinimis Safe Harbor works and if you choose to use that, you simply enter the expense amount under Miscellaneous expenses.

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, this should include your receipt.

To record this in TurboTax use the following steps.

1. When you come to the screen, under Assets (no you don't want to go directly to the asset summary) Did you buy any items that each cost $2,500 or less in 2020? 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 Asset Summary screen.  You have elected the De Minimis Safe Harbor provision.  
   1. Here's how to add your purchases that are $2,500 or less as Miscellaneous Expenses:
   2. Select Add Expense or Asset (may have to scroll ) if you have not already added Miscellaneous Expenses > Continue 
   3. Choose Other miscellaneous expenses.
   4. If you already have Miscellaneous Expenses then click Start or Update > Enter the description and amount 
   5. Or select Add another row to add description and amount

                                     

[birdieblue]

Thank you.  That response was very helpful.  It worked--now I see the election form when I preview my return before filing.

[birdieblue]

Maybe I spoke too soon.  When I looked at my return just before e-filing, the safe harbor election form was there.  Seemingly a success!  Then I e-filed.  Now, when I click on "Download/print return (PDF)", the safe harbor election is gone.  What happened to it?

[DianeW777]

It's not clear without seeing the file.  However, I would keep the information documented in your file should the IRS request any information in the future  The potential information request is printed here for you.  It may very well have been sent in the e-file data even if you do not see it now as a .pdf.  

The statement must be titled "Section 1.263(a)-1(f) de minimis safe harbor election" and include the taxpayer's name, address, taxpayer identification number, and a statement that the taxpayer is making the de minimis safe harbor election under Section 1.263(a)-1(f).

[claybird99]

Hello @DianeW777 ,

I am attempting to again use the De minimus safe harbor election as I did last year. However, this year I am unable to find the question "did you buy any items that cost $2500 or less" which, as I understand it, is necessary for making the de minimus safe harbor election.

Currently, I only have one asset, the rental property. When I choose to "add an asset" it asks me to describe the asset and eventually gives me the section 179 option, but never does it ask me the $2500 question.

Is it possible the de minimus safe harbor election carries over from last year, so all I have to do is list the asset under "miscellaneous expenses"?

[DianeW777]

Yes, you can list it under miscellaneous expenses as long as you meet the qualifications.  Use the description noted and posted here for your convenience.  This clearly indicates you are using the de minimis safe harbor (DMSH).

Description: "Section 1.263(a)-1(f) de minimis safe harbor election"  and amount.

Keep all the records until this asset is sold or junked so that you can track your tax treatment.  Any sale will be a taxable event in the future.

@claybird99 

[claybird99]

@DianeW777 

Thanks for your response!

My understanding is that you must first  have turbo tax generate the de minimus safe harbor election form which will be attached to your return upon filing.

This form is generated after a question regarding the $2500 limitation of your expenses somewhere in the assets section for rental property.

My issue is that I have been unable to determine how to generate that question and thus have the  DMSH form attached to my return.