Sections 162(a) and 263(a) guide taxpayers in determining whether or not an expenditure for tangible property is deductible in the current year or must be capitalized, and the IRS has provided a safe harbor election that a taxpayer may use. This election is available for any business return filed by a C corporation, S corporation, and partnership, as well as by individuals on Schedules C, E, and F.
The section 263(a) safe harbor election is annual election allowing the business to elect to expense certain items rather than capitalize them. This allows the business to deduct in the current tax year the entire amount of the expenditure rather than depreciate the item over a period of time. This election allows the same tax treatment of certain tangibles as treated within the company books.
These expenditures are subject to a monetary limitation in an amount which is referred to as the de minimis safe harbor election. Under this election, the taxpayer must treat all the expenditures that meet the criteria for the election in the same manner in any year that the election is made.
The safe harbor threshold is $2,500 per invoice or per item for a business not having an Applicable Financial Statement (AFS), or $5,000 per invoice or item for a business with an AFS. An AFS is a statement required to be filed with the SEC, the IRS, or any other federal or state government or agency. However, other types of certified audited financial statements accompanied by a CPA report, including a financial statement provided for a loan, reporting to shareholders, or other non-tax purposes is acceptable.
The de minimis safe harbor election does not include amounts paid for inventory and land. It also does not apply to rotable, temporary, and standby emergency spare parts that the taxpayer elects to capitalize and depreciate under § 1.162-3(d), as well as to rotable and temporary spare parts that the taxpayer accounts for under the optional method of accounting under § 1.162-3(e).
However, de minimis amounts paid for tangible property may be subject to capitalization under section 263(a) if the amounts include the direct or allocable indirect costs of other property produced or acquired for resale. For example, all the direct and allocable indirect costs of constructing a new building must be capitalized.
Making The Election
To make this election, the preparer must attach a statement titled "Section 1.263(a)-1(f) de minimis safe harbor election" to the tax return for each taxable year. This statement should include the the name, address, and federal tax ID number, as well as a statement that they are making the de minimis safe harbor election for the applicable tax year.
To make the section 263(a) safe harbor election in an individual return in TaxSlayer ProWeb select:
- Miscellaneous Forms
- Explanations
- Elections Explanations
- Title - Section 1.263 (a)-1 (f) De Minimis Safe Harbor Election
-
Note - Taxpayer Name & Spouse Name
Taxpayer Address
Social Security Number: XXX-XX-XXXX (enter the SSN)
For the year ending December 31, 20XX (where XX equals the last two digits of the tax year)
Taxpayer Name & Spouse Name elects the De Minimis safe harbor under
Treas. Reg. 1.263 (a)-1 (f) for its tax year ending December 31, 20XX.
Note: This is a guide for attaching a de minimis safe harbor election tax return in TaxSlayer ProWeb. It is not intended as tax advice.
Additional Information:
Tangible Property Regulations - Frequently Asked Questions
IRS Notice 2015-82, Increase in De Minimis Safe Harbor Limit for Taxpayers Without an Applicable Financial Statement