My repair & improvements exceed $10,000, but TurboTax still applies Safe Harbor Election for Small Taxpayer?

[bugbash]

I entered 4 assets for my rental property into TT as follow:

1. Appliance $4,200 - TT fully deducts this using Section 179.

2. New roof $15,000 - TT depreciates this normally.

3. House - TT depreciates this normally.

4. Fence replacement $4,000 - TT fully deducts this using Special Depreciation Allowance.

In the end, TT includes "Safe Harbor Election for Small Taxpayer" form in my return. Given that my total improvements exceed the 2%/$10K limit, shouldn't TT have prevented me from electing SHEST? Is this a bug?

[SantinoD]

The safe harbor rule allows you to deduct qualified repairs/maintenance as a current year "deduction" and not have to capitalize as an improvement.  TurboTax might not be utilizing all of the improvements/repairs listed in your question as part of the safe harbor.

In all four of your items, it is taking them as a depreciation expense, not safe harbor rule.

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.

How to enter in TurboTax-

1. Click on Federal Taxes > Wages & Income [In TT Home & Biz:  Business > Continue > I'll choose what to work on]
2. In the Rental Properties and Royalties section, click the Start/Update button.  
3. If you have already started adding information about your business, you will be asked if you want to review your rental and royalty information.  Click the Yes box. 
4. When you come to the Rental and Royalty Summary screen.  Click on the Edit box next to the property.   
5. If you haven't already started adding information about the property, continue through the screens to enter the needed information.
6. You will now be on the Review Your [property name] Rental Summary screen.  
7. In the Assets/Depreciation section, click on the Start/Update box.
8. When you come to the screen, Did you buy any items that each cost $2,500 or less in 2020? mark the Yes button and click Continue. 
9. On the screen Let's see if you qualify to deduct these items as expenses, mark both of the Yes buttons and click Continue. 
10. On the Now, let's review each item you bought screen, mark whether all your new assets cost $2500 or less. 
11. 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.  Proceed with Step 2, below.
12. If you mark that some cost above $2,500, you will be asked Did you make improvements to rental in 2020?

• If you say Yes, you will be taken through the screens for the Improvements election.
• 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. 

[bugbash]

Thanks, but that's the thing though - I didn't answer Yes to this question, yet TT includes Safe Harbor Election form in the final return.

"Did you buy any items that each cost $2,500 or less in 2020?"

[Carl]

The SEC 179 and Special Depreciation Allowance have nothing to do with safe harbor.  SEC 179 allows you to fully depreciate a qualified asset in the tax year it is placed in service. The Special Depreciation Allowance allows you to depreciate 50% (or more or less) of the cost in the first year placed in service. It's just what you might call "accelerated depreciation" (but not really).  Those assets still add to your total cost basis and you still have to recapture and pay taxes on that depreciation when you sell the property assets.

Typically, since long term residential rental real estate already operates at a loss on paper at tax filing time, for many the SDA and SEC179 make no difference in their overall tax liability in the year claimed. But for some it will add to the losses allowed against "ordinary income", which is maxed at $25K for a tax year, provided your AGI is not over the threshold for that tax year, and you actually have the taxable "ordinary" income to deduct it from.

[bugbash]

Right, so in theory TT shouldn't have included the "Safe Harbor Election for Small Taxpayer" form in my return, should it?

I retraced my steps and I think I mistakenly answered "Yes" to TT's question on "Do all of these apply to you .... all repairs, maintenance, etc is less than 2% of cost basis or $10,000 ...?" I fixed that by answering no, but TT still didn't remove the SHEST form from my return.  I created another temporary return and answered that question properly the first time, and TT didn't include SHEST form in the return. Now, I need to figure out how to get TT to remove the SHEST form from my actual return so I don't have to start my return from scratch :( 

Thanks.

[Carl · Accepted solution]

If you're using the CD version of TurboTax, you can switch to forms mode and just delete the uneeded forms.  I don't know how to do that with the online version though.