What Is the De Minimis Exemption for a Business?

The Latin phrase “de minimis non curat lex” translates to “the law does not concern itself with trifles.” In business accounting and tax, this principle is applied to simplify administrative burdens. The Internal Revenue Service (IRS) uses the de minimis concept to establish rules that allow businesses to forgo complex accounting for very small transactions. These exemptions save time and reduce recordkeeping complexities, acknowledging that the effort to account for trivial items often outweighs the benefit.

Expensing Business Property

An application of the de minimis principle is the safe harbor for tangible property, which allows businesses to deduct the cost of low-value assets in the current year. This avoids the process of capitalization, where an asset’s cost is recorded on the balance sheet and gradually expensed over its useful life through depreciation. This immediate deduction provides a more straightforward accounting treatment for inexpensive items and accelerates the tax benefit associated with acquiring new property.

The deduction limit depends on whether a business maintains an Applicable Financial Statement (AFS). An AFS is a formal, audited financial statement, such as one filed with the Securities and Exchange Commission (SEC) or a certified audited statement used for credit purposes. Businesses with an AFS can use a de minimis threshold of $5,000 per item or per invoice.

For businesses that do not have an AFS, a different threshold applies. These businesses can expense items that cost $2,500 or less per item or per invoice. This provides relief for smaller enterprises that purchase equipment or supplies without needing to engage in complex depreciation schedules for each minor acquisition.

To utilize either the $5,000 or $2,500 threshold, a business must have a written accounting policy in place at the beginning of its tax year. This policy must state the company’s procedure for expensing property under a specified dollar amount. For example, the policy might state, “The company elects to expense all tangible property purchases with a cost of $2,500 or less.” This formal policy is a prerequisite for using the safe harbor and must be consistently applied.

Providing Tax-Free Employee Perks

The de minimis concept also extends to certain non-cash benefits provided to employees, known as de minimis fringe benefits. These are perks with such a low value that accounting for them would be unreasonable or administratively impractical. For a benefit to qualify, it must be both of small value and provided infrequently. The IRS does not set a specific dollar amount, as qualification depends on the facts and circumstances of each situation.

Examples of qualifying de minimis fringe benefits include:

• Occasional personal use of a company photocopier
• Periodic snacks like coffee and donuts
• Small, non-monetary holiday gifts such as a turkey or a gift basket
• Occasional tickets for entertainment or sporting events

The infrequent nature of these perks is a determining factor; a benefit provided on a regular basis would not meet the standard.

Certain items are explicitly excluded from being treated as de minimis fringe benefits, regardless of their value. Cash is never considered a de minimis benefit. Similarly, cash equivalents, which include items like gift cards or prepaid debit cards, are always treated as taxable wages to the employee.

Making the Safe Harbor Election

To adopt the de minimis safe harbor for tangible property, a business must make an annual election with its federal tax return. This election must be made for each tax year the business wishes to use the provision by attaching a statement to a timely filed return for the year the expenses were incurred.

The election statement is a document the business creates, as there is no official IRS form for this purpose. The statement must include the business’s name, mailing address, and Taxpayer Identification Number. It should also contain a clear declaration, such as, “The taxpayer is hereby making the de minimis safe harbor election under Treasury Regulation Section 1.263(a)-1.”

This self-created statement is attached to the business’s annual income tax return, such as Form 1120 for corporations, Form 1065 for partnerships, or Schedule C of Form 1040 for sole proprietorships. The election applies to all expenditures meeting the criteria within that tax year. Failing to attach this statement means the business cannot use the safe harbor for that year, even if it has the required written accounting policy.