Contributed by: PhillipB, FreeTaxUSA Agent, Tax Pro
There are a few options that allow business owners and landlords to deduct the cost of tangible property instead of having to depreciate those items as assets. One of those options is known as the de minimis safe harbor for tangible property. Under the safe harbor, a taxpayer can deduct up to $5,000 per item/invoice. The amount that can be expensed depends on the following:
- If the taxpayer has an applicable financial statement (AFS), they can deduct $5,000 per invoice/item.
- If the taxpayer doesn’t have an AFS, they can deduct $2,500 per invoice/item.
The applicable financial statement is defined as a certified audited financial statement, or one filed with the SEC or another government agency. Financial statements compiled or reviewed by a CPA do not qualify as an AFS – the financials must be audited by a CPA firm.
The limit applies on an invoice or item basis:
- If an invoice has a clear breakout on the cost of individual items, the safe harbor can apply to the individual items even if the total amount on the invoice exceeds the established limit.
- If the invoice does not have a clear breakout on the cost of individual items, the limit must be applied to the total invoice amount.
For example, Jimmy Jones owns a small restaurant, and he purchased $10,000 of new kitchen equipment. He did not have audited financial statements, and he never submits financial statements to government agencies.
The invoice for the kitchen equipment was as follows:
- New baking oven: $2,000
- Steel preparation table: $2,000
- Meat slicer: $2,000
- Coffee machine: $1,000
- Soda machine: $1,000
- New refrigerator: $2,000
Jimmy Jones doesn’t have an applicable financial statement, so he is limited to deducting $2,500 per item or per invoice.
Since his invoice has a clear breakout for all the purchased items, he may apply the $2,500 limit to each item and deduct the entire $10,000 as Other Business Expenses.
Conversely, if Jimmy Jones received a $10,000 invoice without a clear breakout for the cost of the equipment, he would have to depreciate all the equipment as a single asset and the limit for the de minimis safe harbor would be $2,500.