Expense or Capitalize? How to Maximize Deductions with the De Minimis Safe Harbor Rule
By: Katie Peabody and Reed Freiburger
When a business buys equipment, furniture, or software, the question often arises: capitalize or expense it immediately? The answer can have a big impact on a business’ bottom line – especially with recent changes to federal and state depreciation rules. Fortunately, the IRS’s ‘de minimis safe harbor election” offers a straightforward way to simplify compliance and maximize deductions. This complexity at the Federal and State level provides opportunities for taxpayers.
Back in 2013 the IRS introduced the Tangible Property Regulations. These regulations provided guidance on capitalization of assets as well as insight on repairs versus capitalizable assets. Within these regulations, the de minimis safe harbor rules were also introduced. Taxpayers can use these rules to confidently maximize current deductions while also getting the best outcomes for state income taxes as well.
De Minimis Safe Harbor Expensing
One often-overlooked opportunity in the world of fixed assets is the de minimis safe harbor election. This rule allows taxpayers to immediately expense smaller asset purchases instead of capitalizing and depreciating them over time.
Businesses without an audited financial statement can expense up to $2,500 per invoice or item.
Businesses with an audited financial statement can expense up to $5,000 per invoice or item.
For non-audited taxpayers, to use this rule, a business must:
Have a written capitalization policy in place as of the start of the tax year, and
Expense purchases under $2,500 for both book and tax reporting purposes.
For audited taxpayers, to use this rule, a business must:
Have a written policy setting a $5,000 capitalization threshold, and
Expense purchases under the limit for tax reporting purposes; book treatment may differ.
Expensing Per Invoice vs Per Item
The safe harbor expensing limits can be applied on a per invoice or per item basis.
If the total amount on an invoice does not exceed the capitalization threshold, it can be expensed in full, even if the invoice includes multiple items for a single project. This means if the contractor bills for wiring installed at $1,600, and separately bills $2,100 for painting, both of those separate invoices could be expensed. An anti-abuse rule prevents taxpayers from proactively splitting invoices for a single asset (i.e. a truck cannot be billed for various parts, so each invoice is under the capitalization threshold), so keep that in mind.
Alternatively, if multiple items are purchased on one invoice, each item under the limit can also be expensed individually. The per unit price does not need to be listed on the invoice, but the number of units and the total cost does need to be shown. This means if 15 refrigerators are purchased for a multi-unit residential rental, for $15,000, all of those refrigerators could be expensed, even though the total invoice exceeds the safe harbor capitalization threshold, since each unit’s cost was only $1,000, the entire invoice can be expensed immediately.
Additional Benefits and Practical Examples
This per-item treatment can be particularly valuable for owners of residential rental property, since building improvements on residential real property typically do not qualify for bonus depreciation. For example, a 40-unit apartment building that replaces every door could expense the entire cost immediately, provided the cost of each door does not exceed $2,500 (or $5,000 if the entity has an audited financial statement). Conversely, this building improvement would not be bonus eligible since bonus can only be taken on Qualified Improvement Property (QIP) which excludes improvements to residential real property.
Additionally, amounts expensed under the de minimis rule are not subject to Michigan’s newly enacted tax depreciation decoupling adjustment which became effective on January 1, 2025. Assets 100% expensed via bonus depreciation for Federal income tax will be required to be added back to the Michigan income tax base and depreciated with the old phase out bonus depreciation rules. Assets directly expensed under the de minimis safe harbor would not be subject to any add-back to Michigan taxable income which avoids the potential increase to the income tax on a Michigan return.
Go Forth and Expense (Wisely)!
Nearly every business invests in fixed assets, and the de minimis safe harbor offers a simple, powerful way to accelerate deductions while staying compliant. If you’d like help drafting a written de minimis expensing policy or evaluating fixed asset purchases for maximum benefit, the FMD team can help apply these rules with confidence.
This post is part of a continuing series-check back for future insights.
