Replace electrical panel == 27.5 year depreciable asset?

[Prethen]

Is my assumption correct that my electrical panels that I replaced in each rental unit is depreciable as part of the real estate property itself (since these are integral to the property itself) at 27.5 years and cannot be expensed (or depreciated at a quicker timeline)? Each panel cost $625 to install.

[KathrynG3]

No. A safe harbor de minimis election can be made allowing for expensing individual receipts less than $2,500.

To do this in TurboTax, when reporting your rental expenses, answer the prompts Yes that you had purchases individually for less than $2,500.

See this article for more information: De Minimis Safe Harbor Election

[Prethen]

I appreciate your response. I did read up on that a bit but wasn't certain that included things that would otherwise be included as part of the real estate property itself. Is it that simple that it doesn't matter what the expense is for and under what depreciation schedule it would have otherwise normally fall under, as long as the receipt is under $2500...that's the basic criterion? 

[KathrynG3 · Accepted solution]

Actually, since it is an electric panel, even though the result is the same, the electric panel would qualify under the Safe Harbor Election for Small Taxpayers, not the De Minimis Election.

To do this in TurboTax,

• for a Schedule E under Rental Properties and Royalties (Sch E), or
• for a Schedule C under Self-employment income & expenses,

under the expenses section, select Assets and follow these steps:

1. If you already have an asset, select Edit next to Improvements, furnishings, and other assets.
2. At Your improvements, furnishings, and other assets select Add Asset.
3. At Do you want to go directly to your asset summary? select No.
4. At Did you buy any items for any business, rental property and/or farm that cost $2,500 or less in 2020? select Yes. (This concerns the De Minimis Election)
5. At Let's see if you can deduct these items as expenses, answer the questions as listed and Continue.
6. Answer the questions according to your circumstances. At Did you make improvements to a building you used for this business in 2020?, select Yes and Continue.
7. At Let's see if you can claim these improvements as expenses answer the questions and Continue. (This concerns the Safe Harbor Election)

Now, report the Electric Panel asset and its details.

• At Describe the building you made improvements to enter your property address.
• At Do you have any items for this business that aren't covered by your elections? Answer Yes and Continue.
• At Describe This Asset, select Real Estate Property and enter the date purchased and Continue.
• At Tell Us a Little More About Your Business Asset, select Qualified Improvement Property and Continue.
• At Tell Us About This Asset / Large Purchase describe the qualified improvement property as Electric Panels, enter the Cost and Continue.
• At Tell Us More About This Asset / Large Purchase, identify whether the panels were bought used or new, whether they are used 100% for the business, the date of purchase and Continue.
• At How Do You Want to Deduct this Item? select your preference and Continue. This is where you can elect to take 100% of the expense as special bonus or as Section 179. If your business is reporting a profit, this will deduct 100% of the expense and the election will allow it.

[Edited 03/02/2021 | 5:20 AM PST]

@Prethen

[Prethen]

Kathryn, I wanted to finish this up this weekend and went back into TurboTax, but I'm a bit confused by your instructions. I already have Schedule E forms filled out for each rental unit, I did not do Self-Employment income, but rather the Rental income path. Your solution will force me to create new self-employment business units for each rental unit, correct? Is the cool to do even though I already have Schedule E forms filled out? How will the IRS rectify the different types of filings for the same business? Thanks again for your awesome replies.

[KrisD15]

Report it on Schedule E and you will have the option of expensing those items. 

Kathryn is correct, but she may be assuming that you are reporting the rentals as a business and using Schedule C. 

Since you are not claiming to be a Real Estate Professional, please enter the electrical panels on your Schedule E. Depreciate the items or claim the full amount of the electrical upgrade on your 2020 tax year return. 

[Prethen]

So, basically, it sounds like I want to avoid saying the panels are (part of the) Real Estate and just expense it as one of the other categories. It becomes 27.5 years no matter what I do in the Real Estate version of depreciation.

[KrisD15 · Accepted solution]

Enter it as an expense on Schedule E.

According to the IRS:

"A person or business can immediately deduct repair and maintenance expenses if the cost is $2,500 or less per item or per invoice."

“Neither the IRC nor prior regulations included a de minimis safe harbor exception to capitalization; you were required to determine whether each expenditure for tangible property, regardless of amount, was required to be capitalized. The de minimis safe harbor election eliminates the burden of determining whether every small-dollar expenditure for the acquisition or production of property is properly deductible or capitalizable. If you elect to use the de minimis safe harbor, you don't have to capitalize the cost of qualifying de minimis acquisitions or improvements. However, de minimis amounts you pay for tangible property may be subject to capitalization under §263A, if the amounts include the direct or allocable indirect costs of other property you produced or acquired for resale. For example, you must capitalize all the direct and allocable indirect costs of constructing a new building.”

IRS Link

[Carl]

To do this in TurboTax, under Self-employment income & expenses,

Why self employment? This is SCH E property, nothing to do with SCH C.

If this is an individual expense for each property (I'm highly certain it is) then you can just expense it in the rental expenses section as a miscellaneous expense and be done with it.

[Prethen]

Kathryn (and others), the bottom line appears to be that you should choose to treat the electrical panel (what would normally be treated as a Real Estate Improvement) as an Asset instead, due to the foreknowledge of the De Minimis deductibility. I'm okay with that and it seems to make logical sense. Because otherwise, TurboTax will assume you mean to treat this as part of the Real Estate proper.

Care needs to be exercised here, assuming that the De Minimis goes away. You don't want to do this type of action when this type of deductibility is no longer allowed or otherwise restricted.