13513: Tangible Property Regulations - Safe Harbor Elections

Making a Safe Harbor Election

Certain regulations contained in the Revenue Procedures do not require an accounting method change (Form 3115), and can be elected by attaching an annual statement to the taxpayer’s timely filed original federal tax return (including extensions) for the taxable year in which certain amounts are paid. The following elections are available:

• Section 1.263(a)-1(f) de minimis election (ELEC screen)
  
• Section 1.263(a)-3(n) election (ELEC screen)
  
• Section 1.263(a)-3(h) election (4562 screen)

On the ELEC screen in an individual return, select either the Taxpayer or Spouse check box. In a business return, choose the applicable election from the drop-list (43, 44, or 45). Election statements are generated with the return that correspond to the election chosen. If making the selection on the 4562 screen in any return, an election statement is produced and the building description as entered in the Description field will be included in the election statement. The statement is e-filed with the return.

What is the de minimis safe harbor election?

The de minimis safe harbor is simply an administrative convenience that generally allows you to elect to deduct small-dollar expenditures for the acquisition or production of property that otherwise must be capitalized under the general rules. 

You may elect to apply a de minimis safe harbor to amounts paid to acquire or produce tangible property to the extent such amounts are deducted by you for financial accounting purposes or in keeping your books and records. If you have an applicable financial statement (AFS), you may use this safe harbor to deduct amounts paid for tangible property up to $5,000 per invoice or item (as substantiated by invoice). If you don't have an AFS, you may use the safe harbor to deduct amounts up to $2,500 ($500 prior to January 1, 2016) per invoice or item (as substantiated by invoice). See IRS Tangible Property Regulations - FAQ for more information.

A taxpayer makes the election by attaching a statement to the taxpayer's timely filed original Federal tax return, including extensions, for the taxable year in which these amounts are paid. The statement must be titled “Section 1.263(a)-1(f) de minimis safe harbor election” and include the taxpayer's name, address, taxpayer identification number, and a statement that the taxpayer is making the de minimis safe harbor election under §1.263(a)-1(f).

What are the requirements to make this election?

The requirements of the safe harbor election for small taxpayers are:

• Average annual gross receipts of $10 million or less; and
• Owns or leases building property with an unadjusted basis of less than $1 million or less; and
• The total amount paid during the taxable year for repairs, maintenance, improvements, or similar activities performed on such building property doesn't exceed the lesser of-
  • Two percent of the unadjusted basis of the eligible building property; or
  • $10,000 (for questions about how to calculate the unadjusted basis, refer to "Figuring the Unadjusted Basis of Your Property" in Publication 946)
• You make the election to use the safe harbor for each taxable year in which qualifying amounts are incurred.
  • The election is made by attaching a statement to your income tax return for the taxable year.
  • An annual election is not a change in method of accounting. Therefore, you shouldn't file Form 3115, Application for Change in Method of Accounting, to make this election or to stop applying the safe harbor in a subsequent year.

What are the rules for determining gross receipts?

Gross receipts for each taxable year generally are defined as the trade or business's receipts for the taxable year that are properly recognized under its method of accounting used for federal tax purposes. For more information, see § 1.263(a)-3 (h)(3)(iv) of the final tangibles regulations.

What items are not included in this election?

• Inventory
• Land
• Rotable, temporary, and standby emergency spare parts that taxpayer elects to capitalize and depreciate under § 1.162-3(d).
• Rotable, temporary, and standby emergency spare parts that taxpayer accounts for under the optional method of accounting under § 1.162-3(e).

What are the rules for determining cost?

The cost of tangible personal property only includes the cost on the invoice; it does not include the cost of acquiring the property if the cost is not on the invoice. If the cost per item is broken down on the invoice by assets, then each asset is considered separately, if the cost is not broken down by asset, then the entire cost on the invoice is the amount subject to the de minimis amount. Costs of acquiring the property that are included on the invoice are allocated to the assets on the invoice using a reasonable method. For example: taxpayer with non-qualifying financial statement receives invoice for 5 computers at $500.00 each totaling $2,500.00, plus shipping and taxes of $250.00, for a total invoice cost of $2,750.00. The taxpayer could determine the cost of each computer to be $550.00 which is less than $2,500.00 and would be required to expense all five computers. On the other hand if taxpayer received an invoice for $2,750.00 for computers (without the breakdown of how many computers) the taxpayer would be required to capitalize this purchase.

What are other effects of this election?

In general, when you elect the de minimis safe harbor, materials and supplies that also qualify under your de minimis safe harbor are treated as de minimis costs and are not treated as materials and supplies. However, the de minimis safe harbor doesn't change your ability to deduct costs for materials and supplies, incidental or non-incidental, that don't qualify under the de minimis safe harbor.

Similarly, the de minimis safe harbor doesn't change your ability to deduct repair and maintenance costs that don't qualify under the de minimis safe harbor, for example, costs that exceed the safe harbor threshold. Therefore, for costs that don't qualify under the de minimis safe harbor, you apply the general rules for identifying and deducting repair and maintenance costs, incidental supplies, and non-incidental materials and supplies.

Is a Form 3115, change in accounting method filed when making a de minimis election?

An annual election is not a change in method of accounting. Therefore, you should not file Form 3115, Application for Change in Method of Accounting, to use the de minimis safe harbor for a particular tax year, and you should not file a Form 3115 to change the amount you deduct under your book policy. Similarly, you should not file a Form 3115 to stop applying the de minimis safe harbor for a subsequent tax year. If you determine that you must file Form 3115, see KB 11627 for details.

Reference the following IRS links for more information:

• IRS Tangible Property Regulations - FAQ
• Rev. Proc. 2015-56
• Rev. Proc. 2014-16
• Rev. Proc. 2014-17
• Rev. Proc. 2014-54
• Rev. Proc. 2015-13
• Rev. Proc. 2015-14
• Rev. Proc. 2016-14