Thankfully, the tax law has brought relief to tax preparers, accountants, real estate investors and business owners everywhere by allowing them to deduct expenditures less than $2,500 rather than capitalizing them. Gone are the days of having to record the coffee pot as a $25 fixed asset depreciated over five years, realizing $5 of depreciation per year.
The “de minimis” safe harbor rule (a little Latin for the day!) went into effect for tax years after 2014, with an initial threshold of $500 per item. This meant a purchase of equipment of $501 would be capitalized and depreciated over its useful life. The IRS increased this threshold to $2,500 in Notice 2015-82, which took effect in 2016.
What does this mean to you? If you are a real estate investor and buy ten replacement windows each with a cost of $800 totaling $8,000 in improvements, you are allowed to expense the $8,000 immediately and do not have to capitalize them or depreciate them. You also will not have to recognize income in the form of depreciation recapture if you sell the rental property in the future. Most appliances purchased fall below the $2,500 threshold for capitalization, meaning you can take those deductions immediately.
If you are in the process of major renovation, the first step is to list individual expenditures of items that can be uniquely identified – such as windows, doors, fans, sinks, faucets, toilets, window treatments (blinds), and appliances – and accumulate the total dollar amount. Be sure to have detailed invoices or receipts for these purchases. The IRS requires receipts or detailed invoices to be able to substantiate the deduction. The total can be deducted as De Minimis Expense under other expenses for either Schedule E for rental properties or Schedule C for sole proprietor small businesses.
Better to take a deduction immediately than over a number of years. Just say de minimis!!
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Reducing Taxes – Increasing Wealth
Please understand that I cannot give you specific investment or legal advice, just guidance in these areas, and you should consult a professional licensed in these areas for specific advice before making any final decisions.
