Is the "de minimus Safe harbor" election the same as Safe Harbor election for small taxpayers"election

[optca50]

For my rental property, I do not qualify for the "Safe Harbor election for small taxpayers" because total of all repairs, maintenance and improvements was more than $10,00.

1) Was wondering if the "de minimus Safe Harbor" had a different criteria from "Safe Harbor election for small taxpayers"? If so, what is the criteria?

2) If the election is one and the same thing, then how do I get rid of the "Section 1.263(a)-1(f)
De Minimis Safe Harbor Election" page from my tax return? 

[Anonymous_ · Accepted solution]

The two are indeed different.

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

A de minimis safe harbor election

Note: Effective for taxable years beginning on or after January 1, 2016, the Internal Revenue Service in Notice 2015-82PDF increased the de minimis safe harbor threshold from $500 to $2500 per invoice or item for taxpayers without applicable financial statements. In addition, the IRS will provide audit protection to eligible businesses by not challenging the use of the $2,500 threshold for tax years ending before January 1, 2016 if the taxpayer otherwise satisfies the requirements of Treasury Regulation § 1.263(a)-1(f)(1)(ii).

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

There is also the safe harbor for small taxpayers for improvements in Treas. Reg.§1.263(a)-3(h):

See https://www.law.cornell.edu/cfr/text/26/1.263(a)-3

[optca50]

If they are different elections, does that mean the only criteria for claiming the de minimus safe harbor is that the expense/improvement is less than $2,500? 

For background information, the total of ALL repairs/improvements for this property were $22,000 (which would not qualify for the safe harbor for small businesses). When I separate the items (water heater, cabinets, countertops, rock garden landscaping, new plumbing), each is under $2,500 so can I just categorize each under "miscellaneous expenses"?

[Anonymous_]

Yes. The $2,500 maximum is per invoice or per item as separated in the invoice.

[DumbDadLTG]

related question to this.

also adding @DianeW777 as she answered my DMSH question last year and this thread was a year old:

Don't have all my forms yet to file but just getting prepped on the trickiest part.

So for 2024 I think I have both "de minimus Safe harbor election(DMSH)" and "Safe Harbor election for small taxpayers election". last year was my first year using DMSH so wanted to clarify if I can and how to use both.

My repairs faller under the 10k just barely and that limit is smaller than the 2% limitation. 

I have water heater purchase of ~$700. Installed myself

I have new vinyl windows lot purchase price from manufacturer directly~$3300, separate installing contractor invoice ~$1800.

I have replacement furnace  - equipment plus install by contractor -  on 1 contractor invoice ~$3200.

Do I put the Water heater under "DMSH", and  the windows, window install and furnace under "Safe Harbor election for small taxpayers"? If yes, can you advise noteworthy step by step instructions, or is the Turbotax questionnaire pretty intuitive to follow?

Thanks in advance for your review/response.

[DianeW777]

Yes, I can help and will be addressing it as rental property as this is mentioned in earlier posts.  The cost of any items that are‌ attached to the building should be included under the Safe Harbor election for small taxpayers. Technically the hot water heater is not a structural component and therefore could be used under the De Minimis Safe Harbor.

IRS definition of Structural components (for your review):

Parts that together form an entire structure, such as a building. The term includes those parts of a building such as walls, partitions, floors, and ceilings, as well as any permanent coverings such as paneling or tiling, windows and doors, and all components of a central air conditioning or heating system including motors, compressors, pipes, and ducts. It also includes plumbing fixtures such as sinks, bathtubs, electrical wiring and lighting fixtures, and other parts that form the structure.

Step by step instructions - In the end the expenses will be entered as a miscellaneous expense so pay close attention to the steps after discussion of the safe harbor questions.

1. When you come to the screen, Did you buy any items that each cost $2,500 or less in 2024? 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, and 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 your rental in 2024?
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?  Continue through the screens to enter these assets. 
8. Continue to complete your entries
9. Select Edit beside your property 
10. Scroll to select Add expense or asset 
11. Scroll to select the expense Miscellaneous 
12. Click the checkbox > Scroll to select Continue 
13. Scroll to the expense you selected and click the Start button to enter your expense description and amount.

@DumbDadLTG 

[DumbDadLTG]

@DianeW777 

Thanks Dianne,

I think I'm going astray somewhere so will add your steps where I got slightly diufferent choices and see if you can figure out where I'm going astray:

• 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. 
  • Not for my case (Water heater < 2500, windows, furnace>2500)
• If you mark that some cost above $2,500, you will be asked Did you make improvements to your rental in 2024?
• If you say Yes, you will be taken through the screens for the Improvements election.
  • I said _"No" (is that correct for my case above?)
• If you say No, you will see the screen 
  • I did say "no"
• Do you have any items that aren't covered by your elections? 
  • I said "no" again. Is that correct?
• Continue through the screens to enter these assets. 
  
  • So do I in fact add new assets? I thought not (I'm using the DMHSE and SHEFST to qualify as expenses?)  Thought assets would put them in the improvements category. when I did a simple test it started to take me down the 179 path

I think I'm off your path at this point

• Continue to complete your entries
• Select Edit beside your property 
• Scroll to select Add expense or asset 
  • I only see "Add Asset" (no expense) - which tells me I went astray as you path is very prescriptive 
• Scroll to select the expense Miscellaneous 
  • and clearly I didn't make it to this screen
• I can add screen shots if forum allows and  you would be helpful

appreciate your further assistance

[DianeW777]

You do indicate that you want to add a new asset. 

You do not want depreciation on those assets.

 In other words you must finish this section screen by screen until you come back to the screen to select Miscellaneous expense. 

• Continue through the screens to enter these assets.  
• Before you‌ enter a new asset, you will be asked about the DeMinimis Safe Harbor qualifications. 
  
  • So do I in fact add new assets? Yes, you start the process, then TurboTax will stop before you actually enter it. 
  • I thought not.- This is correct.  

Continue to the screen 'Want to take the safe harbor election this year for assets $2,500 or less?'

• Select Yes. Continue as TurboTax takes you back to the expense screen list. Then scroll to select Miscellaneous expenses > Enter Description and Amount.

                       

                      

@DumbDadLTG 

[DumbDadLTG]

@DianeW777 

Hi Dianne,

still not getting your screens. I have tried so many variations including just entering the water heater (DMSH) to see where that takes me. everything goes back to the eventual 179 screen.  never get those two pop up screen shots you included in last reference

Before we go any further one thought:

I am using downloaded desktop turbotax deluxe version. I always get the prompts to upgrade, but have never had to do that before and have not thus far done that this year (I have read with online version you can NOT  accurately handle rental property with deluxe - but again, I am using desktop version).

Is deluxe possible the issue?

If not, would you suggest I pivot to live support for $60....and how does that work - can we share screen?

Also thanks for the previous IRS reference for "structural components". I didn't see an exact correlation with the TTax questions. for my windows and $3200 furnace  I was guessing at the TTax  "describe this asset"

In the first screen I selected first choice (rental property) following screen I selected "appliances,, carpet , furniture".

My attempt at adding screenshots  (looks to be working so also added the 179 screen I keep ending up with regardless of variation (i.e.; I never get the DMSH screen that you included previously):

Thanks!

[DumbDadLTG]

@DianeW777 

Hi Dianne,

I went back to your 2023 input and opened my 2023 .tax file and think I have a solution/workaround – following your guidance from last year. I was not getting the DMSHE pop up screen question you referenced last year either, but by answering the questions (<2500 etc), those apparently triggered the proper DMSHE form (see screenshot – from opening forms and searching), and I manually went back into misc expenses and added the expensed with the suggested verbiage you referenced for that year.

So,  to check the possible workaround,  I then modified my 2023 - as a test - since I have both DMSHE and SHEFST and followed same logic. Answered the questions for this year scenario (both above and below 2500), added no assets, but went back to misc expenses and added the expenses there with similar verbiage (referenced the form name for >2500…see screen shot – the first 3 are actual from last year – the new for this year  are simply entered as tests for the different scenarios).

When I open  forms, I NOPW find BOTH  DMSHE and SHEFST forms which is good. But it does look like using this method I will have to add some descriptions to the SHEFST form.  If I am correct, any guidance there? Do I add simply use same expense verbiages – AND do I enter the amounts (as text)?

[DianeW777]

Yes, you are exactly right.  You have taken the correct steps for the TurboTax Desktop version.  

Use the same description entered on your 2023 return for your 2024 return, then enter the amounts for each type of Safe Harbor.

DeMinimis Safe Harbor (DMSH) - Section 1.263(a)-1(f); and 

Safe Harbor for Small Business can be used for the second description. 

• The link is about this topic for your convenience.

NOTE:  It's important to keep the records of these deductions because these expenses will reduce the cost basis of your property when you dispose of it, such as a sale.

[DumbDadLTG]

Thank you Dianne.

Couple clarifications (I think this is it!) and a new QBI question since it popped up.

And this time I will not include the personal info in the screenshots – (Thank you TTax for catching/removing)

For the SHEFST your verbiage was small “business” (vs small “taxpayer”). Was that intentional? Screenshot how I entered after your most recent input.

Also, the SHFEST prepopulated with my Rental property name (see screenshot – I CHANGED THE PROPERTY NAME)

Do I need to add anything in the way of the actual two expenses that are taking advantage of that election…or is this form just intentioned to identify the property (Business) qualifying for the election?

Finally, QBI.

Previous 2 years I more than exceeded the 250-hour requirement, as had a relatively difficult tenant and it was in the first two years since acquiring/converting the property to rental (Lots of initial activity). Now (2024)  I have a relatively “maintenance free” tenant and fewer Property manager type issues – but am still hands on.

I’m closer to 150-200 hours. However, walking through the TTax screens, it appears to be prompting me that I can still qualify. I’ve read concerns on forum about claiming this if I have less than the 250 hours; however from the TTAx questions (see screenshots) I easily meet the criteria in those respective questions.

I drilled into TTAx “?more info” and found:

Examples

• You rent a piece of bare land you own to a long-term tenant. You don't provide or maintain any improvements to the land. The tenant is responsible for any improvements. There is very little that needs to be done to collect income from this property besides depositing monthly checks. This type of activity is typically not classified as a trade or business. (Note that farm rentals reported on Form 4835 would commonly follow this fact pattern.)

• So this is close to my scenario in one aspect (stable tenant) – however I am involved with some of the major maintenance, repairs (Roof leak), improvements (example of the windows, water heater, furnace – even if two of those were installed by contractor).
•  I was still very involved – but by my log, unless I missed something, I’m only at 200 hours max.

So - would you lean toward claiming the QBI or not? I will still be making a profit for this year.

[DumbDadLTG]

@DianeW777 

sorry Dianne,

one more to add to the previous, but forgot to address to you (@) on that one so hopefully you can review together.

In addition to the questions above, was clarifying how to enter my SHFSTE new vinyl windows line item in expense. Right now I grouped the window purchase from window vendor ($3k), installation contractor invoice ($1800), and Misc finishing materials ($200 - I also purchased those directly from vendor) into One  line item combined misc expense of ~$5k.  Is that correct or do I need to break out in separate misc expense line items?

[DianeW777]

You are correct, the actual description is 'Safe Harbor Election for Small Taxpayers' versus Business. 

Yes, the property is being associated with the election, so the property's name is fine.

One line item combined miscellaneous expense of ~$5k.  Is correct. You don't need to break it into separate categories.  Keep in mind to keep track of all of these expenses until you sell the property.  It will  be a reduction to your cost if sold.

Qualified Business Income Deduction (QBID):

The time frame would still be relatively close to the 250 hours, so you should be sure you have a good record. Add anything you missed, like work and hours any other person or contractor may have, like lawn care. If you are confident with the questions and records, you should continue with the QBID.

@DumbDadLTG