With the de minimis safe harbor for tangible property, you can deduct the cost of certain tangible property as an expense, even if you would normally have to capitalize and depreciate it over its useful life. To qualify for the de minimis safe harbor, the property must meet three requirements:
- The property must be tangible, meaning it can be seen, touched, or felt.
- The property must be used or consumed in your trade or business.
- The cost of the property must be under a certain dollar threshold.
For tax year 2022, the dollar threshold is $2,800 per item or invoice. This means that if you purchase tangible property for your business that costs $2,800 or less per item or per invoice, you can deduct the full cost as an expense on your tax return, rather than capitalizing and depreciating it over its useful life.
For example, let’s say you own a small retail business and you purchase a new cash register for $2,500. Normally, you would have to capitalize and depreciate the cost of the cash register over its useful life, which could be several years. But because the cost of the cash register is under the $2,800 threshold, you can deduct the full cost as an expense in the year you purchased it.
It’s important to note that the de minimis safe harbor is an annual election, meaning you have to elect to use it each year on your tax return. Also, the safe harbor does not apply to inventory items, land, or buildings. Additionally, you must have a written accounting policy in place at the beginning of the tax year that follows the de minimis safe harbor. This policy must specify the dollar threshold you will use, and it must be consistent with your treatment of these expenses on your financial statements.
In summary, the de minimis safe harbor for tangible property allows small business owners to deduct the cost of certain tangible property as an expense, rather than capitalizing and depreciating it over its useful life. This can save time and money on bookkeeping and tax preparation, while still preserving wealth through tax planning. Remember to consult with a tax professional to ensure you are using the de minimis safe harbor correctly and to maximize your tax savings.
As a business owner, understanding the tax code and what expenses can be deducted can be overwhelming. One area that can be particularly confusing is when it comes to purchasing equipment or machinery for your business. Do you just expense it all at once, or do you need to capitalize it and depreciate it over time?
The answer is that it depends on the size and nature of the equipment. If it’s a small item, like office equipment or tools, you can typically expense it in the current year. However, if it’s a larger item, like a forklift or heavy machinery, you will need to capitalize it and depreciate it over its useful life.
The tax code has provisions, like the 179 deductions and special depreciation, which may allow you to take the expense up front, even if you’re forced to capitalize it. However, these provisions may change over time, so it’s important to keep an eye on them.
If you have an applicable financial statement, you may use the safe harbor to deduct amounts paid for tangible property up to $5,000 per item or invoice. If you don’t have an applicable financial statement, you may use the de minimis safe harbor to deduct amounts paid for tangible property up to $2,500 per item or invoice.
From an accrual theory standpoint, it makes sense to capitalize and depreciate larger items to match the cost with the income earned over the useful life of the equipment. However, from a practical standpoint, it may not be worth the hassle of depreciation for smaller items.
In addition to equipment expenses, there are other expenses that you may be able to deduct, such as advertising, bank fees, donations to business organizations, education expenses, permit-related expenses, interview expenses, licenses and regulatory fees, moving expenses, penalties and fines, repairs and maintenance, supplies and materials, and utilities.
When it comes to supplies and materials, it’s important to review your general ledger accounts to ensure that there are no large items that should be capitalized and depreciated instead of expensed.
Understanding the tax code and what expenses can be deducted can be complicated, but it’s important for business owners to have a good grasp on it to ensure that they’re maximizing their deductions and not running afoul of the IRS. It’s always a good idea to consult with a tax professional to ensure that you’re following the rules and regulations and minimizing your tax liability.