Tangible property regs. de minimis safe-harbor election: frequently asked questions.

• Author: Clark, Nathan P.

The final tangible property regulations (T.D. 9636) issued in September 2013 provided guidance for taxpayers to elect a minimum capitalization threshold, otherwise known as the de minimis safe harbor. The safe harbor allows taxpayers to set a minimum capitalization amount under which amounts are not capitalized. Eligible taxpayers must:

1. Have an applicable financial statement;

2. Have at the beginning of the tax year written accounting procedures treating as an expense for nontax purposes amounts costing less than a specified dollar amount or amounts paid for property with an economic useful life of 12 months or less;

3. Treat such amounts as expenses on its applicable financial statement in accordance with its written accounting procedures; and

4. Apply the expense treatment only to amounts paid for property that do not exceed $5,000 per invoice (or per item as substantiated by the invoice).

Taxpayers without an applicable financial statement are also eligible for the de minimis safe harbor. However, the threshold amount is reduced to $500 per invoice or item, and the accounting procedures are not required to be in writing.

The de minimis safe harbor is one of the areas of the regulations where taxpayers have significant questions. Below are some of the most frequently asked questions:

Q: What costs are deductible under the de minimis safe harbor?

A: The de minimis safe harbor applies to amounts paid for property otherwise required to be capitalized under Regs. Sec. 1.263(a)-2(d)(1) (acquired or produced tangible property) or Regs. Sec. 1.263(a)-3(d) (improvements of tangible property) or required to be treated as a material or supply under Regs. Sec. 1.162-3(a). Further, amounts not deductible as de minimis expenses (i.e., amounts larger than the de minimis threshold) may still be deductible under other Code sections, such as those for deductible repairs and maintenance.

Q: Are written capitalization procedures required by every business electing the de minimis safe harbor?

A: The de minimis procedures are not required to be in writing if the taxpayer does not have an applicable financial statement and is applying the lower $500 de minimis threshold. If the taxpayer has an applicable financial statement and intends to apply a threshold greater than $500 but less than $5,000, the accounting procedure must be in writing. A best practice, however, is to document these procedures in writing.

Q: How is the de minimis election made?

A: The...