Tax Tip: De Minimis Safe Harbor on Expensing Depreciable Improvements
Landlords experienced in DIY taxes may not be aware that in 2013 and again in 2016 the IRS issued new guidance that permits expensing of items under a de minimis dollar amount, even if the regulations otherwise require depreciating those items.
Depreciation vs Deduction
Section 162 of the Internal Revenue Code allows business owners to deduct all ordinary and necessary repairs and maintenance in a single year. But Section 263(a) of the Internal Revenue Code requires businesses to capitalize the costs of improving tangible property. This means taking that deduction in small amounts over the life of the item. This is called depreciation. For items like blinds, doors, and countertops, which were affixed permanently to the property, this often meant depreciating absurdly small numbers.
De Minimis Safe Harbor
Under the latest guidance, items under $2,500 that do not fall within certain classes of building systems, or that are installed for small businesses (defined in the guidance), may qualify for safe harbor expensing instead of depreciation.
For instance, an interior door that routinely gets destroyed from renter abuse may now be replaced wholesale and expensed. So can anything that is outside the building structure or the following list of key building systems: the plumbing system, the electrical system, the HVAC system, the elevator system, the escalator system, the fire protection and alarm system, the gas distribution system, and the security system. Anything else, including vinyl flooring, carpets, sheetrock, paint, vanities, countertops and much more might now possibly be deducted under the safe harbor exemption.
Additional restrictions apply. Most importantly, the item cannot be an improvement over what was there before. Replacing an original wooden door and non-working mortise lock with a modern hollow core door and Schlage lockset will probably be considered an improvement. When you eventually replace the hollow core door with another hollow core door, that may be expensed.
There is another restriction: The expense has to be an amount paid for recurring activities that you expect to perform 1.) As a result of your use of the property in your trade or business; 2.) To keep the property in its ordinarily efficient operating condition; and 3.) When you reasonably expect, at the time the property is placed in service, to need to replace this item more than once during the 10-year period beginning when placed in service.
This has significant advantages for landlords who install the cheapest possible countertop, planning to replace these countertops entirely each vacancy. Provided the countertops fall under the $2,500 limit each, these countertops may be treated as expenses, even though they remain “permanently” affixed to the building.
Note that the safe habor might not apply, however, to under $2,500 worth of tile in a hallway, or to $2,500 worth of quartz countertop. Would you reasonably expect to replace these studier items more than once in the next ten years? Probably not.
To claim the safe harbor, you must attach a statement with your return specifically claiming the safe harbor.
For more detail, see the IRS Guidance on Tangible Property Final Regulations.
This article has not been written by an accountant. Always consult a tax accountant before taking any action that could affect your financial obligations to any jurisdiction.
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One Response to Tax Tip: De Minimis Safe Harbor on Expensing Depreciable Improvements
Segments of this article are incorrect and/or misleading. The descriptions combine two separate Safe Harbors, namely De Minimis and the Routine Maintenance Safe Harbor, and describe them both as being De Minimis. For example is says there is a restriction that one must “reasonably expect, at the time the property is placed in service, to need to replace this item more than once during the 10-year period beginning when placed in service.” This is not a restriction under the De Minimis Safe Harbor at all. It only applies to the Routine Maintenance Safe Harbor. Many of the facts listed are true, but they apply to one of the Safe Harbors and not the other. This article needs to be fact-checked and split into two.