Just a brief discussion of what this means exactly, and for purposes of this article, De Minimis is referred to in a different context than the “5% price rule” in the 263a exception. This safe harbor is something that any business owner should know about, regardless of industry. The final tangible property regulations issued by the IRS apply to anyone who incurs costs to acquire, produce, or improve tangible real or personal property in carrying on his or her trade or business. The safe harbor was basically a simplification of a complex accounting subject: allowing certain costs to be expensed without consideration of capitalization rules in order to simplify things a little bit. If a cost qualified for the de minimis safe harbor, it could be expensed.
Relevant Thresholds: If you have applicable financial statements (AFS), allowed deduction up to $5,000 per invoice or item (as substantiated by invoice)
If you do not have AFS, allowed deduction up to $2,500 (was $500 up to December 31st, 2015 until IRS notice 2015-82) per invoice or item (as substantiated by invoice)
The de minimis safe harbor does not include amounts paid for inventory and land. It does not apply to rotable, temporary, and standby emergency spare parts that the taxpayer elects to capitalize and depreciate under § 1.162-3(d)—an election to capitalize and depreciate certain materials and supplies. Neither the IRS nor prior regulations had a de minimis safe harbor exception to capitalization, meaning up until a few years ago, you were required to identify the classification of every single expenditure made for tangible property, regardless of amount (i.e. capitalized vs. expensed).
I want to leave you with this one important distinction. If you acquire tangible property that exceeds the safe harbor limitations, it just means that they are not subject to the de minimis safe harbor election. It does not mean you definitively have to capitalize! Disqualification from the de minimis safe harbor would just require consideration of the normal capitalization rules that apply, i.e. currently deductible if incidental supplies or materials. This means that if you were to not have AFS, and you spent $4,000 on a routine repair of a piece of business equipment you are currently depreciating, you may be able to expense the repair costs in full. The de minimis safe harbor is a tool implemented for convenience to alleviate the burden faced by small business owners of determining whether every small-dollar expenditure for the acquisition or production of property is properly deductible or capitalizable.
I hope this was helpful.
Feel free to give me a call or shoot me an email if you have any questions or need clarification.
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