De Minimis Safe Harbor Election: Act Now To Be Eligible For 2018
With the confusing terminology, complicated tax code and the feeling that tax rates are just too high, many business owners hear “taxes” and run the other way. However, there is one tax phrase that’s easy to understand and every business owner likes to hear: safe harbor.
With the de minimis safe harbor election, you can immediately expense certain assets up to $2,500. If you have an applicable financial statement (AFS), this goes up to $5,000.
Sound good? You must act NOW to ensure that your business is eligible to make this election for the 2018 tax year.
What Is the De Minimis Safe Harbor Election?
A safe harbor allows you to take certain actions with minimal questioning, assuming you follow IRS rules. For the de minimis safe harbor election, the limit is generally $2,500 per asset, but if you have an AFS, the limit goes up to $5,000. Taking advantage of the de minimis safe harbor election can substantially reduce your business’s income tax burden.
You might be wondering whether you have an AFS. An AFS is any financial statement that is required to be filed by the SEC. However, if you do not file with the SEC but your financial statement is audited by a CPA firm, then you have an AFS.
$2,500 or $5,000 might not seem like much money at first, but remember: this is per asset.
Let’s say you don’t have an AFS and bought 50 office desks at $2,000 per desk. This safe harbor election allows you to expense the entire $100,000 of the purchase, with no questions asked by the IRS. However, this does not mean that any purchase above $2,500 (or $5,000) cannot be expensed; it will just be subject to the usual codes and scrutiny of the IRS.
Section 179 Exists, So Why Make the De Minimis Safe Harbor Election?
Section 179 is an undeniably powerful tax planning tool when it comes to fixed asset management for your business. However, there are certain ways in which Section 179 cannot compete with the de minimis safe harbor election. For example:
- There is a limit on Section 179 deductions that can be taken per year. The de minimis safe harbor election delivers the same advantages as Section 179, while saving the Section 179 ceiling limit for items that do not qualify under the safe harbor.
- In order to use Section 179, the expensed items must be listed in your assets. Over time, your asset books are bound to become cluttered. The de minimis safe harbor election allows your qualified purchase to go directly to an expense, saving you the hassle of recording and depreciating a new asset in your books, with no questions asked.
- Section 179 is subject to a recapture period that could potentially increase or complicate your taxes if careful planning isn’t done. The de minimis safe harbor election avoids that.
Let’s look at a real-life business scenario where the de minimis safe harbor election is used in a strategic way.
Your business purchased $610,000 in equipment in 2017, $100,000 of which is the office desks from the example above. Under Section 179 for 2017, you would only be able to expense $510,000 while needing to capitalize $100,000, regardless of how you tried to break up or group the assets.
However, with the de minimis safe harbor election, you would be able to immediately expense the $100,000 you paid for the desks, along with any other items below the safe harbor limits within the remaining $510,000. This not only puts you below the Section 179 ceiling, but also simultaneously lowers the Section 179 amount that could be recaptured at a later date.
How To Make the Safe Harbor Election
If you’re like most business owners, you welcome any opportunity to lower your tax liability. Taking advantage of the safe harbor election is quite simple, but each step is essential.
Here’s a brief step-by-step guide to making the election for 2018:
As always, it’s good practice to keep invoices for all assets purchased. In the event of an IRS audit, the invoices will help prove which assets are and are not below the limit.
In the scenario above, for example, it is important to be able to prove that each desk costs $2,000, thus supporting the $100,000 expense. It would be unfortunate if you were unable to prove the cost and suddenly gained $100,000 in income due to the expense being disallowed.
The de minimis safe harbor election offers a considerable opportunity to lower your organization’s tax liability. There are also certain exceptions within the safe harbor that could help lower your tax liability. We recommend that you work with your CPA to ensure that you qualify – and stay qualified – for the election.
Contact us online or call 800.899.4623 to get help with tax planning strategies for your business.
Published on December 12, 2017