What Are De Minimis Assets for a Business?
Learn the criteria for treating small business asset purchases as immediate expenses rather than capital assets for both accounting and tax purposes.
Standard accounting practice requires that tangible property, such as equipment or furniture, be capitalized and depreciated. This means the cost of the asset is spread out over its useful life. The concept of “de minimis” originates from a Latin phrase meaning “about minimal things.” In an accounting context, it refers to items whose value is so small that tracking and depreciating them is inefficient. Expensing these minor purchases immediately simplifies bookkeeping and reduces administrative burdens.
The De Minimis Safe Harbor for Business Assets
The Internal Revenue Service formalized this concept through the tangible property regulations, establishing the de minimis safe harbor election. This provision allows businesses to choose to deduct smaller-cost items in the year of purchase instead of depreciating them. By treating the entire cost as an expense, a business can potentially lower its immediate tax liability.
This safe harbor is not an automatic rule but an annual election that a business must make. The purpose is to eliminate the administrative burden associated with tracking low-cost assets over their lifespans. The regulations provide two different monetary thresholds for expensing assets, which depend on whether a business has a particular type of financial statement.
Qualification Thresholds and Policies
A business may qualify for one of two de minimis safe harbor thresholds based on the presence of an Applicable Financial Statement (AFS). An AFS is a formal financial statement, such as one certified by an independent CPA or filed with the Securities and Exchange Commission (SEC). For businesses that possess an AFS, the de minimis threshold is set at $5,000 per item or per invoice.
To use this higher threshold, a business must have a written accounting policy in place at the beginning of the tax year. This policy must state that the company treats purchases under a specified dollar amount as expenses for non-tax, financial accounting purposes. The amount specified in the policy does not have to be exactly $5,000, but it must be consistently applied.
For businesses that do not have an AFS, a lower threshold of $2,500 per item or invoice applies. While the IRS does not require a written policy for this threshold, the business must have an established accounting procedure that it follows consistently to expense items below a certain cost.
A requirement for using either threshold is book-tax conformity. This means the treatment of the item for financial accounting purposes must match its treatment for tax purposes. If a business capitalizes an asset on its books, it cannot use the de minimis safe harbor to expense it on its tax return.
Determining Asset Cost for Expensing
The de minimis safe harbor is applied on a per-item or per-invoice basis. The cost of an asset includes all amounts paid to acquire and place it in service, such as invoice prices, delivery fees, and installation charges. These additional costs must be included in the total cost when determining if it falls below the applicable $2,500 or $5,000 threshold.
The distinction between “per item” and “per invoice” is important. If an invoice contains multiple items, the threshold is applied to each individual item, not the total invoice amount. For example, if a business without an AFS purchases 15 office chairs for $200 each on a single $3,000 invoice, it can expense the entire $3,000 because each chair is below the $2,500 threshold.
Conversely, if a business purchases a single piece of equipment that costs $3,000, it cannot use the de minimis safe harbor, as the cost of that single item exceeds the $2,500 limit. This asset would need to be capitalized and depreciated. This rule prevents businesses from breaking down the cost of a single, more expensive asset into smaller components to fit under the threshold.
When an invoice includes both materials and services, the total cost must be allocated reasonably to the tangible property acquired.
How to Make the Annual Election
Making the de minimis safe harbor election is a step that must be completed each year a business wishes to use it. The election is made by attaching a statement to the business’s timely filed federal income tax return, including extensions. This election cannot be made on an amended return and is irrevocable for that year.
The required statement must be titled “Section 1.263(a)-1(f) de minimis safe harbor election.” The document needs to include the taxpayer’s name, address, and Taxpayer Identification Number (TIN). It must also contain a declaration that the taxpayer is making the election under Treasury Regulation Section 1.263(a)-1.
For businesses filing a consolidated return, the election is made by the group and applies to all its members. In the case of a partnership or an S corporation, the election is made at the entity level, not by the individual partners or shareholders.
Failing to attach this specific statement to the tax return means the election has not been made. The IRS could then disallow the expensing of otherwise qualifying items upon examination.