What is covered by the de minimis safe harbor election?

[Kiwienergy]

I have read several TT posts and other public posts on the de minimis safe harbor election and remain confused from conflicting perspectives.

I purchased several items for rental properties that were all less that $2500 each. I would appreciate feedback on which of these are covered by the de minimis safe harbor and which must be depreciated.

Replaced 9 windows ($2000 each)

Replaced vinyl flooring planks (not glued down)

Replaced carpet (tacked in place - not glued down)

Replaced curtains

Light shades (can easily be removed)

Television

Heater

Vent fans

Thanks in advance for your feedback

[tagteam · Accepted solution]

What is covered by the de minimis safe harbor election?

All tangible property, whether real or personal.

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

Obviously, the regulations are inapplicable to property held for personal use.

[Kiwienergy]

Thanks Champ, Can i understand from your reply that all items I listed above are covered by the de minimis safe harbor? That is 

Replaced windows ($2000 each), vinyl flooring planks (not glued down), carpet (tacked in place - not glued down), curtains, llight shades, Television, Heater, Vent fans are all covered if less than $2500 each? Thanks

[tagteam]

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@Kiwienergy wrote:

........are all covered if less than $2500 each?

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Yes, that is correct.

[Mike9241]

  The amount paid for the property does not exceed $2500 per invoice (or per item as substantiated by the invoice) 

here's an example from the IRS regulations  - each item is less than $2500 but the total invoice over $2500

requirements to elect de minimis safe harbor if no applicable financial statements

(A) The taxpayer does not have an applicable financial statement (as defined in paragraph (f)(4) of this section);

(B) The taxpayer has at the beginning of the taxable year accounting procedures treating as an expense for non-tax purposes -

(1) Amounts paid for property costing less than a specified dollar amount; or

(2) Amounts paid for property with an economic useful life (as defined in § 1.162-3(c)(4)) of 12 months or less;

(C) The taxpayer treats the amount paid for the property as an expense on its books and records in accordance with these accounting procedures; and

(D) The amount paid for the property does not exceed $2500 per invoice (or per item as substantiated by the invoice) or other amount as identified in published guidance in the Federal Register or in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b) of this chapter).

Example. De minimis safe harbor; taxpayer without Applicable Financial Statement. (as revised per the latest IRS notice (changes $500 to $2500) 
In Year 1, B purchases 10 computers at $600 each for a total cost of $6,000 as indicated by the invoice. Assume that each computer is a unit of property under § 1.263(a)-3(e). B does not have an AFS. B has accounting procedures in place at the beginning of Year 1 to expense amounts paid for property costing less than $1,000 (up to $2,500) and B treats the amounts paid for the computers as an expense on its books and records. The amounts paid for the printers meet the requirements for the de minimis safe harbor under paragraph (f)(1)(ii) of this section because the amount paid for the property (while the invoice is for more than $2,500) is less than $1000 for each computer (substantiated by the invoice). B may apply the de minimis safe harbor election to the amounts paid for the 10 computers under paragraph (f)(1) of this section.

so what was your specified $ amount for expensing at the beginning of your tax year for accounting purposes 

see highlighted line above 

if you used less than $2000 then the windows would need to be expensed

part of the reg 1.263(a)-1 is an anti-abuse rule

(6) Anti-abuse rule. If a taxpayer acts to manipulate transactions with the intent to achieve a tax benefit or to avoid the application of the limitations provided under paragraphs (f)(1)(i)(B)(1), (f)(1)(i)(D), (f)(1)(ii)(B)(1), and (f)(1)(ii)(D) of this section, appropriate adjustments will be made to carry out the purposes of this section. For example, a taxpayer is deemed to act to manipulate transactions with an intent to avoid the purposes and requirements of this section if -

(i) The taxpayer applies the de minimis safe harbor to amounts substantiated with invoices created to componentize property that is generally acquired or produced by the taxpayer (or other taxpayers in the same or similar trade or business) as a single unit of tangible property; and

(ii) This property, if treated as a single unit, would exceed any of the limitations provided under paragraphs (f)(1)(i)(B)(1), (f)(1)(i)(D), (f)(1)(ii)(B)(1), and (f)(1)(ii)(D) of this section, as applicable.

note that (i) and (ii) are only examples,  

[Carl]

Just curious.

Replaced windows ($2000 each),

Are you serious? Two thousand dollars EACH window? Does this property have multiple massive picture windows maybe?

vinyl flooring planks (not glued down),

This sounds to me like one of those "floating floors" consisting of 4-6 foot planks/strips that fit together tongue-n-groove. I see this most in common areas (living/dining rooms) and occasionally the kitchen.

carpet (tacked in place - not glued down),

I take that as the standard wall-to-wall carpeting installed with "nail grabber sticks" which are nailed into the hard floor base.

All three of the above are property inprovements with no question, and they do qualify for safe harbor election if the requirements outlined in the final regulation referenced by @tagteam 

curtains, llight shades,

These are not property improvements. They are expenses and are deductible as such. If it's replacements for what was there before it can be classified as a repair expense. Otherwise, you can call it maintenance expenses, or more appropritately miscellaneous expense. What you classify it as has no impact and causes no change on the tax front through. An expense is an expense is an expense....

Television,

This would be an asset classified as an appliance and depreciated over 5 years. But I doubt you would put one in a rental that costs more than $2,500. So it would make sense to expense it under safe harbor.

Heater,

LIke one of those portable room heaters I presume? If so, that too would be an asset classified as an appliance and depreciated over 5 years. Again, I'm sure there's no way you're putting one in a rental that costs more than $2,500. So expensing it under safe harbor makes sense.

Vent fans 

Assuming these are fans that have to be installed and wired into existing duct work by a professional, they become "a physical part of" the structure. Normally, they'd be classified as residential rental real estate (if installed in such property) and depreciated over 27.5 years. But if the cost is less than $2,500 each (and the invoice indicates that)  then it makes sense to expense it via safe harbor. Now at one time things were interpreted as saying that if it becomes "a material part of" the property, then regardless of cost, it had to be depreciated. While the IRS has not completely establish total clarity on that yet that I can find, the interpretation of the "final regulations" allows it now. ( or doesn't disallow it, however one looks at it.)

The important thing to keep in mind here, is that those items you elect to expense under safe harbor can not be added to your cost basis of the property at any time, ever.

[tagteam]

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@Carl wrote:

....While the IRS has not completely establish total clarity on that yet that I can find, the interpretation of the "final regulations" allows it now.

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The Regulations encompass tangible personal property and real property (so there is "total clarity").

As a result, tangible personal property that is permanently affixed to real property becomes "part of" that real property and is, therefore, specifically included.

[Kiwienergy]

Thanks tagteam (and Carl). I really appreciate the new information and details.

It sounds like in the past, property that cost < $2500 that became permanently fixed to a rental property (e.g. windows, carpet, vent fans etc) were considered improvements and would not qualify under the de minimis safe harbor. 

However, it sounds like the new/recent 'final regulations' (Jan 5, 2022) allow (or don't disallow) these items of property (<$2500)  that are permenently attached to the rental property (e.g. windows, carpet, vent fans etc) , to be expensed under the de minimis safe harbour (assuming the safe harbor & anti-abuse requirements as detailed above are met).

Is this correct?

If so, does it mean kitchen, bathroom, electrical and plumbing improvements in a rental property (<$2500 per invoice) can also be expensed under the de minimis safe harbor (assuming the safe harbor & anti-abuse requirements are met)?

Thanks again

[tagteam]

@Kiwienergy 

Yes, you can expense the cost of any tangible personal or real property, under the de minimis safe harbor, provided the invoice is $2,500 or less. 

The current regulation simply raised the maximum cost per invoice from $500 to $2,500.

[AmeliesUncle]

I just going to voice my pet peeve about this subject:  Most people seem to think you automatically qualify for the $2500 de minimis election.  That is not that case.

(1) You need to have decided on a SPECIFIC dollar amount (which may or may not be $2500).

(2) You need to have decided that at the BEGINNING of the year.

(3) You must have been treating those items under that specific dollar amount as fully deductible expenses for your 'books'.

I realized that those requirements are difficult to prove, so the the IRS would be unlikely to question it.  But the rules do state that you need to have set up the 'plan' ahead of time (but you don't need to decide if you want to make the election or not until you file your tax return).  

The taxpayer has at the beginning of the taxable year accounting procedures treating as an expense for non-tax purposes -

(1) Amounts paid for property costing less than a specified dollar amount; or

(2) Amounts paid for property with an economic useful life (as defined in § 1.162-3(c)(4)) of 12 months or less;

(C) The taxpayer treats the amount paid for the property as an expense on its books and records in accordance with these accounting procedures

https://www.law.cornell.edu/cfr/text/26/1.263(a)-1#f

[tagteam]

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@AmeliesUncle wrote:

I realized that those requirements are difficult to prove, so the the IRS would be unlikely to question it.  But the rules do state that you need to have set up the 'plan' ahead of time......

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I absolutely agree that the requirements you stated are indeed mandatory and also would be very difficult to prove (particularly, that the taxpayer had set a specific dollar amount at the beginning of the tax year).

Also required with respect to the election is that the taxpayer cannot pick and choose; if the de minimis safe harbor election is made for one item (material or supply), it is then applicable to all materials and supplies.