De minimis safe harbor election
de minimis safe harbor / $2,500 de minimis rule / IRS de minimis election
The de minimis safe harbor election is an IRS rule for deducting small equipment purchases in the year they are paid for. It covers up to $2,500 per invoice or item, or $5,000 for a business with an applicable financial statement. The election is made on each year's return.
Before this rule, every purchase of tangible property, however small, needed a decision about whether to capitalize it and write it off over time. The election removes that decision for qualifying items. It comes with a condition. The business must also expense those items in its own books, under an accounting procedure in place at the start of the tax year.
The regulation itself still prints $500 as the limit for a business without an applicable financial statement, a category that includes statements filed with the SEC. The $2,500 figure comes from IRS Notice 2015-82, which raised the limit for tax years beginning on or after January 1, 2016. The regulation allows for exactly that kind of change through published guidance. Businesses with an applicable financial statement get $5,000.
Two details decide whether a purchase fits. Delivery fees, installation and similar charges count toward an item's cost when they appear on the same invoice, and stay out of it when billed separately. A purchase above the limit gets nothing under the election and goes back to the normal rules. Inventory and land never qualify.
The election is made by attaching a statement to the timely filed original return for the year, extensions included. It then applies to every expenditure that qualifies that year. Starting or stopping it needs no Form 3115, the form for changing an accounting method.
In practice
A landscaping company buys four laptops at $1,900 each on one invoice, which also carries a $300 setup charge. Spread evenly across the four machines, the setup adds $75 each, so each laptop costs $1,975 and fits under the $2,500 limit. A $3,200 mower bought the same month exceeds the limit and is handled under the normal rules. The figures are a worked example.
Why it matters to you
The election turns a stack of small purchases into deductions in the year of purchase, with no depreciation schedule to keep for each one. It depends on the books treating the same items as expenses. That policy has to exist on the first day of the year, before the purchases are made.
What to ask or check
- 01Was the de minimis safe harbor election statement attached to last year's return, and is it planned for this year's?
- 02Do the books expense purchases under a set dollar amount, and was that policy in place on the first day of the tax year?
- 03Does the business have an applicable financial statement, and so which limit applies, $2,500 or $5,000?
- 04Are delivery and installation charges on the same invoice being counted in each item's cost?
What people get wrong
That a purchase over the limit can deduct the first $2,500 under the election. An amount above the limit falls outside the safe harbor entirely and goes back to the normal rules.