The $ 2500 De Minimis Safe Harbor for Business Spending
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Today’s classic is being republished by White Coat Investor. You can see the original Here.
When most people talk about the “safe haven” they are referring to paying enough taxes on top of your withholding taxes and quarterly estimated payments so as not to pay penalties or interest. But there is another safe haven you should know about, especially as a business owner.
There is also a safe haven for business expenses. Before 2016 it was $ 500, since then it’s been $ 2500. This means that over time, you won’t have to “capitalize and write off” anything you buy for your business (computers, furniture, etc.) as long as each item costs less than $ 2,500. You can simply deduct everything (“expense”) in the year in which you buy it. If you are looking for information on this subject, look for “material costs” and specifically for “de minimis safe harbor”.
Reporting on expenditure for “De Minimis Safe Harbor”
It is necessary to include a declaration with your taxes stating that you wish to deduct these expenses in the first year. However, as a sole proprietorship, you can list the expenses anywhere in your Appendix C. If you really want to dot your i’s and cross your t’s, you can consider adding them all up on line 27a (Other Expenses) and calling them “Section 1.263 (a) -1 (f) De Minimis Safe Harbor Election Costs” it is not necessary to designate that. You need to be careful about including this expense on other lines of Schedule C when using Turbotax or H&R Block as the software will likely still prompt you to write it off. Seems the easiest to me to just put it on line 27a. If it’s just an item under $ 2500 it might look like this:
Even if you had a bunch of items that cost less than $ 2500 each, here’s how you could do it:
If you’re a partnership filing a 1065, usually put this expense on line 20 (and include an explanation):
If you are filing as S Corp (Form 1120-S) it is the same, but it continues on line 19:
How to use the safe haven of De Minimis
So how can this be useful? The main benefit for me is that I can only spend a computer, phone, printer, office furniture, and similar expenses instead of messing with the depreciation rules. But getting that deduction sooner rather than later is more valuable because of the time value of money.
You can also use this safe haven for repair and maintenance costs for $ 2,500. In fact, you can potentially go over $ 2500 and still be in safe haven under two other scenarios:
First, if the company has revenues of less than $ 10 million and the property is worth less than $ 1 million, you can spend up to $ 10,000, or 2% of the property’s value, for repairs, whichever is lower – / spend maintenance costs.
Second, all repair costs can be deducted immediately if the repairs consist of routine maintenance and meet four criteria:
- The repairs are regular repetitive activities that you expect to perform.
- The repairs result from the wear and tear of use in your trade or business.
- The repairs are necessary for the property to function efficiently in its normal condition.
- The repairs are expected to be required more than once during a 10 year period for buildings and structures related to buildings or more than once during the property’s class life for real estate other than buildings.
These rules also apply to improvements that would normally need to be written off, subject to the $ 10,000 or 2% of property value rule above and the $ 10M / $ 1M rule above. This is ideal for direct real estate investors.
What should your statement look like?
It doesn’t have to be anything special. Tom Copeland suggests that you make it look like this:
Section 1.263 (a) -1 (f) De Minimis Safe Harbor Option
Your name _________________
Your address __________
EIN or social security number __________
For the year ending December 31, 2015, I choose the de minimis safe harbor under Treas. Reg. Section 1.263 (a) -1 (f) for my business expenses of less than $ 2,500.
When buying things for your company, follow the de minimis safe harbor rule. You will save a little tax money and a lot of hassle if you can avoid having to write off your business expenses and spend them instead.
What do you think? What are some examples of how you’ve used the $ 2,500 safe haven to make your business life easier? Comment below!