The de minimis safe harbor lets you deduct relatively inexpensive property in one year without worrying about complex depreciation rules.
By Stephen Fishman, J.D. USC Gould School of Law
Updated by Amy Loftsgordon, Attorney University of Denver Sturm College of Law
When your business buys a long-term asset, the cost might have to be deducted over several years. However, many business owners are able to deduct all (or mostly all) of their purchases in a single year by taking advantage of tax rules.
For example, if you buy a relatively inexpensive item, you can deduct the expense in one year using the de minimis safe harbor rather than capitalizing it. (When you "capitalize" an asset, you spread writing off the item over several years.) Basically, the de minimis safe harbor allows businesses to deduct in one year the cost of certain long-term property items.
IRS regulations set a maximum dollar amount—$2,500, in most cases—that may be expensed as "de minimis," which is Latin for "minor" or "inconsequential." (IRS Reg. §1.263(a)-1(f)). While $2,500 might not seem like a lot of money, this deduction can really add up because there's no limit on how many items costing up to $2,500 each you can deduct every year.
- What Is De Minimis Safe Harbor Property?
- What Can't Be Deducted Under the De Minimis Safe Harbor?
- What Is the De Minimis Safe Harbor Expense Limit?
- Qualifying for the De Minimis Safe Harbor
- Claiming the De Minimis Safe Harbor
- Read More Articles
- Get More Information
What Is De Minimis Safe Harbor Property?
The de minimis safe harbor is most often used to deduct the cost of tangible personal property items (units of property) you use in your business.
Example. Alex buys two computers for her business at $2,000 each for a total cost of $4,000, as shown on the invoice. By using the de minimis safe harbor, she can deduct the entire $4,000 expense in a single year, provided the requirements to use the safe harbor are satisfied.
This category doesn't include components acquired as part of a unit of property, such as the original engine in an automobile. Any item with an economic useful life of 12 months or less must be deducted under the de minimis safe harbor if the cost is within the de minimis limit.
You can use the de minimis safe harbor to deduct the cost of property you don't use 100% of the time for business. Your deduction is limited to the dollar amount of your business use percentage.
Example. Shelby buys a $2,000 camera and uses it 50% of the time for her photography business and 50% of the time for personal purposes. She can deduct $1,000 of the cost using the de minimis safe harbor. But she couldn't deduct the camera using the safe harbor election if it cost more than $2,500.
What Can't Be Deducted Under the De Minimis Safe Harbor?
This safe harbor can't be used to deduct the cost of land, inventory (items held for sale to customers), certain spare parts for machinery or other equipment, or amounts that you pay for property that you produce or acquire for resale.
What Is the De Minimis Safe Harbor Expense Limit?
The maximum amount you can deduct under the de minimis safe harbor depends on whether your business has an "applicable financial statement" for the year, such as:
- a certified financial statement a CPA prepares (certified financial statements by CPAs usually cost at least several thousand dollars, and few small businesses have them) or
- a financial statement, other than a tax return, your business files with the SEC or other state or federal agency (not including the IRS), such as a Form 10-K or an Annual Statement to Shareholders. Only larger corporations or businesses that are publicly traded usually file such statements.
$2,500 or $5,000 De Minimis Safe Harbor Limit
If you don't have such a financial statement, you may use the de minimis safe harbor only for property that doesn't cost more than $2,500 per invoice, or $2,500 per item as substantiated by the invoice. (This amount was $500 in the original version of the regulation, but the IRS increased it to $2,500 effective in 2016.) If the cost exceeds $2,500 per invoice (or item), no part of the cost may be deducted by using the de minimis safe harbor.
Example: Alex, from the above example, purchased two computers for her business at $2,000 each for a total cost of $4,000 as indicated by the invoice. Alex has accounting procedures in place at the beginning of the year to expense amounts paid for property costing less than $2,500, and she treats the amounts paid for the computers as an expense on her books and records. The amounts paid for the computers meet the requirements for the de minimis safe harbor. Alex may currently deduct the entire amount as an ordinary and necessary business expense.
If you have an applicable financial statement, then you may increase the per item or per invoice amount up to $5,000.
How to Determine the Cost of an Item
In determining whether the cost of an item exceeds the $2,500 or $5,000 threshold, you must include all additional costs that are on the same invoice with the tangible property—for example, delivery and/or installation fees.
Also, you can't break into separate components property that you would normally buy as a single unit.
Example. Alex buys a desk for her office for $3,000. She tells the store to separately bill her $250 for each of the four desk drawers and $2,000 for the rest of the desk. Because a desk usually includes drawers as part of a single unit, the IRS adds the cost of each component to determine that the actual cost is $3,000. So, the desk doesn't qualify for the de minimis safe harbor.
Qualifying for the De Minimis Safe Harbor
To qualify for this de minimis expensing safe harbor, a taxpayer must:
- establish before the first day of the tax year (January 1 for calendar year taxpayers) an accounting procedure requiring it to expense amounts paid for property either costing less than a certain dollar amount and/or with an economic useful life of 12 months or less, and
- actually treat such amounts as currently deductible expenses on its books and records.
If you have an "applicable financial statement" and wish to qualify to use the $5,000 de minimis limit, your accounting procedure must be in writing and signed before January 1 of the tax year. If you don't have such a statement and qualify only for the $2,500 limit, you don't need to put your procedure in writing (although you still may do so). But it should still be in place before January 1 of the tax year.
Claiming the De Minimis Safe Harbor
To take advantage of the de minimis safe harbor, you must file an election with your tax return each year. When you make this election, it applies to all expenses you incur that qualify for the de minimis safe harbor. You can't pick and choose which items you want to include. You must also include items that would otherwise be deductible as materials and supplies.
Read More Articles
Find out about IRS audit rates and the odds of being audited in What Are the Triggers of IRS Tax Audits?
Learn how much time most people spend doing business taxes.
Read about common tax deductions for individuals.
Get More Information
For more information on this and other tax issues for small businesses, get Deduct It! Lower Your Small Business Taxes, by Stephen Fishman (Nolo).
If you need more help, talk to a tax professional, such as a certified public accountant or a tax attorney. A tax professional can prepare tax returns or provide tax information, guidance, or representation before the IRS.
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