Property Safe Harbor Policies (updated for 2016)

 

 

 

 

 

The U.S. Department of the Treasury issued new regulations in September 2013 that affect how businesses, including owners of residential rental property and Schedule C businesses, handle materials and supplies, repairs, and improvements to their business properties.  The new regulations are extensive and require changes in how business property is handled for both accounting and tax purposes.  Compliance is mandatory beginning January 1, 2014.

 

Several provisions in the new regulations are beneficial to taxpayers.  One such provision is the ability to claim a safe harbor election for 2014 and 2015 on a taxpayer’s return to expense up to $500 per invoice (or per item as substantiated by an invoice) for items that would previously require capitalization and depreciation.  The amount has been increased to $2,500 beginning January 1, 2016.  To claim the de minimis safe harbor election within a return, the taxpayer must have in place as of January 1 of the calendar year a written policy stating that the taxpayer will expense all units of tangible property or materials and supplies below a set dollar amount of at least $500 (or $2,500 beginning in 2016) for non-tax purposes (the threshold can increase to $5,000 for taxpayers who have an applicable financial statement for the calendar year).  Those taxpayers that do not have a written policy in place by January 1 of the calendar year may not have sufficient evidence to claim the safe harbor election on that year’s tax return.

 

In order to provide evidence to claim the safe harbor election for any business property you own (including for a residential rental property or a Schedule C business), we recommend that you download the draft policy (above), complete it as indicated (be sure to sign and date it) and return it to us for our permanent files.  We should have the signed policy in our files by December 31, in order to support this safe harbor election on your tax return.  We recommend that written safe harbor policies be prepared at the taxpayer or entity level, including for those business properties located inside and outside the United States.

 

Please also note that compliance with the new repair and capitalization regulations may require us to file additional forms or allow for additional elections with your tax returns.  We will notify you when we become aware that additional forms or elections are needed, or are possible, for your tax returns.

Please contact us with any questions.

 

DEFINITIONS OF PROPERTY SAFE HARBOR POLICIES

Material and Supply: §1.162-3(c)(1) tangible property that is used or consumed in the taxpayer’s operations that is not inventory and that

•  Is a component acquired to maintain, repair, or improve a unit of tangible property owned, leased, or serviced by the taxpayer and that is not acquired as part of any signle unit of tangible property;

• Consists of fuel, lubricants, water, and similar items, reasonably expected to be consumed in 12 months or less, beginning when used in the taxpayer’s operations;

• Is a unit of property as determined under §1.263(a)-3(e) that has an economic useful life of 12 months or less, beginning when the property is used or consumed in the taxpayer’s operations;

• Is a unit of property as determined under §1.263(a)-3(e) that has an acquisition cost or production costs (as determined under Section 263A) of $200 or less (or other amount as identified in published guidance in the Federal Register or in the Internal Revenue Bulletin, or,

• Is identified in published guidance in the Federal Register or in the Internal Revenue Bulletin as materials and supplies for which treatment is permitted under this section.

 

Unit of Property (§1.263(a)-3)

 Building:  Each building and its structural components 9as defined in §1.48-1(e)(2)) is a single unit of property

 

Building System:  Structural components specifically identified in Treasury Regulations that are considered building systems separate from the building structure:

    a HVAC (including motors, compressors, boilers, furnace, chillers, pipes, ducts, radiators)

    b Plumbing systems (including pipes, drains, valves, sinks, bathtubs, toilets, water and sanitary sewer collection equipment, and site utility equipment used to distribute water and waste to and from the property line and between buildings and other permanent structures);

    c Electrical systems (including wiring, outlets, junction boxes, lighting fixtures and associated connectors, and site utility equipment used to distribute electricity from the property line to and between buildings and other permanent structures;

    d All escalators

    e All elevators

    f Fire-protection and alarm systems (including sensing devices, computer controls, sprinkler heads, sprinkler mains, associated piping or plumbing, pumps, visual and audible alarms, alarm control panels, heat and smoke detection devices, fire escapes, fire doors, emergency exit lighting and signage, and fire fighting equipment, such as extinguishers, and hoses);

    g Security systems for the protection of the building and its occupants (including window and door locks, security cameras, recorders, monitors, motion detectors, security lighting, alarm systems, entry and access systems, related junction boxes, associated wiring and conduit);

    h Gas distribution system (including associated pipes and equipment used to distribute gas to and from the property line and between buildings or permanent structures); and

     i Other structural components identified in published guidance in the Federal Register or in the Internal Revenue Bulleting (see §601.601(d)(2)(ii)) of this chapter that are excepted from the building structure under paragraph (e)(2)(ii)(A) of this section and are specifically designated as building systems under this section.

     j Property Other Than Building:  all components that are functionally interdependent comprise a single unit of property.  Components of property are functionally interdependent if the placing in service of one component by the taxpayer is dependent on the placing in service of the other component by the taxpayer.

    k Improvements to Property:  an improvement to a unit of property generally is not a unit of property separate from the unit of property improved.  Amounts paid to improve a unit of property must be capitalized (unless they fall under safe harbor treatment).

    l Year Placed in Service:  notwithstanding the unit of property determination, a component (or a group of components) of a unit property must be treated as a separate unit of property if, at the time the unit of property is initially pace in service by the taxpayer, the taxpayer has properly treated the component as being within a different class of property under Section 168(e) (MACRS classes) than the class of the unit of property of which the component is a part, or the taxpayer has properly depreciated the component using a different deprecation method than the depreciation method of the unit of property of which the component is a part.

 

Federal Tax Regulations (§1.263(a)-1), Internal Revenue Service, Capital expenditures; in general

(f) De minimis safe harbor election

 

   (1)  In general – Except as otherwise provided in  in paragraph (f)(2) of this section, a taxpayer electing to apply the de minimis safe harbor under this paragraph (f) may not capitalize under §1.263(a)-2(d)(1) or §1.263(a)-3(d) 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 under §1.162-3(a) any amount paid in the taxable year for tangible property if the amount specified under this paragraph (f)(1) meets the requirements of paragraph (f)(1)(i) or (f)(1)(ii) of this section.  However, section 263A and the regulations under section 263A require taxpayers to capitalize the direct and allocable indirect costs of property produced by the taxpayer (for example, property improved by the taxpayer) and property acquired for resale.

 

(i)  Taxpayer with applicable financial statement – A taxpayer electing to apply the de minimis safe harbor may not capitalize under §1.163(a)-2(d)(1) or §1.263(a)-3(d) nor treat as a material or supply under §1.162-3(a) any amount paid in the taxable year for property iin paragraph (f)(1) of this section if –

  (A)  The taxpayer has an applicable financial statement (as defined in paragraph (f)(4) of this section);

  (B)  The taxpayer has at the beginning of the taxable year written accounting procedures treating as an expense for non-tax purposes –

      (1)  Amounts paid for property costing less than a specified dollar amount; or

      (2)  Amounts paid for property with an economic useful life (as defined in §1.162-3(c)(4)) of 12 months or less;

   (C)  The taxpayer treats the amount paid for the property as an expense on its applicable financial statement in accordance with its written accounting procedures; and

   (D)  The amount paid for the property does not exceed $5,000 per invoice (or per item as substantiated by the invoice) or other amount as identified in published guidance in the Federal Register or in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b) of this chapter).

 

(ii)  Taxpayer without applicable financial statement – A taxpayer electing to apply the de minimis safe harbor may not capitalize under §1.263(a)-2(d)(1) or §1.263(a)-3(d) nor treat as a material or supply under §1.162-3(a) any amount paid in the taxable year for property described in paragraph (f)(1) of this section if –

    (A)  The taxpayer does not have an applicable financial statement (as defined in paragraph (f)(4) of this section;

    (B)  The taxpayer has at the beginning of the taxable year accounting procedures treating as an expense for non-tax purposes –

       (1)  Amounts paid for property costing less than a specified dollar amount; or

       (2)  Amounts paid for property with an economic useful life (as defined in §1.162-3(c)(4)) of 12 months or less;

    (C)  The taxpayer treats the amount paid for the property as an expense on its books and records in accordance with these accounting procedures; and

    (D)  The amount paid for the property does not exceed $500 ($2,500 beginning January 1, 2016) per invoice (or per item as substantiated by the invoice) or other amount as identified in published guidance in the Federal Register or in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(b) of this chapter).

       

 

(iii)  Taxpayer with both an applicable financial statement and a non-qualifying financial statement –

 

For purposes of this paragraph (f)

    (1), if a taxpayer has an applicable financial statement defined in paragraph (f)(4) of this section in addition to a financial statement that does not meet requirements of paragraph (f)(4) of this section, the taxpayer must meet the requirements of paragraph (f)(1)(i) of this section to qualify to elect the de minimis safe harbor under this paragraph (f).

     (2)  Exceptions to de minimis safe harbor – The de minimis safe harbor in paragraph (f)(1) of this section does not apply to the following:

 

(i)  Amounts paid for property that is or is intended to be included in inventory property;

 

(ii)  Amounts paid for land;

 

(iii)  Amounts paid for rotable, temporary, and standby emergency spare parts that the taxpayer elects to capitalize and depreciate under §1.162-3(d); and

 

(iv)  Amounts paid for rotable and temporary spare parts that the taxpayer accounts for under the optional method of accounting for rotable parts pursuant to §1.162-3(e).