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Effective for taxable years beginning on or after January 1, 2014, taxpayers can elect annually a de minimis safe harbor to not capitalize any amount paid in the taxable year for the acquisition or production of a unit of tangible property nor treat as a material or supply any amount paid in the taxable year if the amount specified meets the requirements of this regulation.

Qualifications of the de minimis safe harbor election:

The taxpayer must have at the beginning of the taxable year written accounting procedures to treat as an expense for non-tax purposes:

  • Amounts paid for property costing less than a specified amount (see Limits), OR
  • Amounts paid for property with an economic useful life of 12 months or less

Limits:

A taxpayer without an Applicable Financial Statement (e.g. certified audited financial statement) can elect to expense the property if the amount paid does not exceed $500 per invoice (or per item as substantiated by the invoice).

A taxpayer with an Applicable Financial Statement (e.g. certified audited financial statement) can elect to expense the property if the amount paid does not exceed $5,000 per invoice (or per item as substantiated by the invoice).

Making the Election

A taxpayer makes the annual 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 Section 1.263(a)-1(f). A taxpayer may not revoke an election made under this rule.

Small Taxpayer Safe Harbor

Pursuant to Reg. section 1.263(a)-3(h), a qualifying small taxpayer may elect to not apply improvement rules to an eligible building if the total amount paid during the taxable year for repairs, maintenance, improvements, and similar activities performed on the building does not exceed the lesser of: $10,000 or 2% of the unadjusted basis of the building. A qualifying small taxpayer includes a taxpayer whose average annual gross receipts for the three preceding taxable years are $10 million or less. An eligible building includes a building that is owned or leased by the qualifying small taxpayer if the unadjusted basis of the building property is $1 million or less. If the small taxpayer safe harbor is applicable and elected, a qualifying taxpayer is not required to apply the improvement standards to owned or leased eligible buildings.

Making the Election

A qualifying taxpayer elects the small taxpayer safe harbor annually by including a statement in its timely filed, original tax return for the year of the election. The statement must be titled "Section 1.263(a)-3(h) Safe Harbor Election for Small Taxpayers" and include the taxpayer's name, address, taxpayer identification number, description of each eligible building property to which the taxpayer is applying the election, the amounts paid for repairs, maintenance, improvements and similar activities performed on the eligible building(s) described above qualify under the safe harbor provided in Reg. section 1.263(a)-3(h)(1).

In the case of an S corporation or a partnership, the entity makes the election (not the shareholders or partners). Once made, the election is generally irrevocable and may not be changed through the filing of an application for change in accounting method.

To enter the election in the TaxAct 1040 and 1041 program:

Schedule C (Form 1040) Profit or Loss From Business

  1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
  2. Click Business Income in the Federal Quick Q&A Topics menu to expand, then click Business income or loss from a sole proprietorship.
  3. Click + Add Schedule C to create a new copy of the form or click Edit to review a form already created.
  4. Continue with the interview process to enter all of the appropriate information.
  5. On the screen titled Great! Let's get started on expenses for this business, click Enter expenses.
  6. On the screen titled Do you want to make any repair regulation elections for this business?, check the specific election to have this statement e-filed and printed with the return, then click Continue.

Schedule E (Form 1040) Supplemental Income and Loss

  1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
  2. Click Rent or Royalty Income in the Federal Quick Q&A Topics menu to expand, then click Real estate rental income.
  3. Click + Add Schedule E, Pg 1 to create a new copy of the form or click Edit to review a form already created.
  4. Continue with the interview process to enter all of the appropriate information.
  5. On the screen titled Rental Income - Expenses, click Yes.
  6. On the screen titled Rental Income - Repair Regulation Elections, check the specific election to have this statement e-filed and printed with the return, then click Continue.

Schedule F (Form 1040) Profit or Loss From Farming

  1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
  2. Click Business Income in the Federal Quick Q&A Topics menu to expand, then click Farming income or loss.
  3. Click + Add Schedule F to create a new copy of the form or click Edit to review a form already created.
  4. Continue with the interview process to enter all of the appropriate information.
  5. On the screen titled Farm Income - Expenses, click Yes.
  6. On the screen titled Farm Income - Repair Regulation Elections, check the specific election to have this statement e-filed and printed with the return, then click Continue.

Form 4835 Farm Rental Income and Expenses (Form 1040 TaxAct program only)

  1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
  2. Click Rent or Royalty Income in the Federal Quick Q&A Topics menu to expand, then click Farm rental for crop shares.
  3. Click + Add Form 4835 to create a new copy of the form or click Edit to review a form already created.
  4. Continue with the interview process to enter all of the appropriate information.
  5. On the screen titled Farm Rental - Expenses, click Yes.
  6. On the screen titled Farm Rental - Repair Regulation Elections, check the specific election to have this statement e-filed and printed with the return, then click Continue.

Additional Information:

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.


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