Section 1.263(a)-1(f): De Minimis Safe Harbor Election

Treasury Regulation Section 1.263(a)-1(f) provides the de minimis safe harbor election, a provision designed to simplify accounting for businesses. This election allows a business to immediately deduct low-cost expenditures for acquiring or producing property. Instead of capitalizing these small-dollar items and depreciating them over several years, they can be expensed in the year of purchase. This reduces the administrative burden associated with tracking numerous small assets.

Eligibility and Dollar Thresholds

A taxpayer’s eligibility to use the de minimis safe harbor and the applicable dollar limit depends on whether they have an Applicable Financial Statement (AFS). An AFS is a formal financial statement, such as one certified as audited and used for credit purposes, reporting to shareholders, or filed with the Securities and Exchange Commission (SEC).

For taxpayers with an AFS, the safe harbor permits the deduction of items costing up to $5,000 each. To qualify, the business must have a written accounting policy in place at the beginning of the tax year that dictates expensing property below a certain dollar amount. The policy must be consistently applied, meaning the business also treats these expenditures as expenses on its AFS for the year. If the internal policy sets a lower expensing threshold than $5,000, the taxpayer is bound by that lower amount.

For taxpayers who do not have an AFS, a different threshold and slightly modified requirements apply. These businesses may use the safe harbor to deduct items costing up to $2,500 each. These taxpayers must also have an accounting procedure in place at the beginning of the year to expense items under a certain amount. While this procedure does not have to be in a formal statement, it must be a policy the business follows consistently for its own books and records.

Applying the Safe Harbor to Property Purchases

The safe harbor threshold is applied on a per-item or per-invoice basis. If an invoice lists multiple items and each one is at or below the applicable $5,000 or $2,500 threshold, the entire invoice can qualify. The cost of an item includes all amounts paid to acquire and place it in service, such as delivery and installation fees, if they are on the same invoice.

For example, consider a business without an AFS that purchases 10 office chairs at $200 each on a single invoice for $2,000. Since the cost per item is below the $2,500 threshold, the business can expense the entire $2,000 purchase. If that same invoice included a desk costing $3,000, the chairs could be expensed, but the desk would not qualify and must be capitalized.

This safe harbor applies to tangible property, such as equipment, furniture, and computers. The rule excludes certain property, most notably land and inventory, which must be handled according to other tax code provisions.

Making the Annual Election

The de minimis safe harbor election must be made annually, offering businesses flexibility in tax planning. A business might choose to make the election in one year but not the next, depending on its purchasing activity and tax situation.

To make the election, a taxpayer must attach a statement to their timely filed original federal income tax return, including extensions. Filing the statement with an amended return is not permitted. The election is irrevocable for the year it is made, meaning a taxpayer cannot later decide to capitalize items they chose to expense under the safe harbor for that tax year.

The required statement must include the following information:

• A title that reads “Section 1.263(a)-1(f) de minimis safe harbor election.”
• The taxpayer’s name, address, and Taxpayer Identification Number.
• A declaration that the taxpayer is making the de minimis safe harbor election under § 1.263(a)-1(f).