What Is the De Minimis Tax Rule for a Business?

The term “de minimis” originates from a Latin phrase regarding minimal things. In legal and administrative contexts, this principle allows for the disregard of trivial matters to avoid a disproportionate burden. This concept of administrative convenience is part of U.S. tax law, simplifying compliance by creating thresholds for low-value transactions. It acknowledges that the effort to account for every minor item can outweigh the tax consequence.

Applying the De Minimis Rule to Employee Fringe Benefits

Internal Revenue Code Section 132 allows employers to provide certain low-value fringe benefits to employees without including their value in taxable income. For a benefit to qualify, its value must be so small and provided so infrequently that accounting for it would be unreasonable. The determination depends on the specific facts and circumstances of each situation, not a strict dollar limit.

The frequency and value of the benefit are the primary considerations. Examples of qualifying benefits include occasional personal use of a company copy machine, company-provided coffee and donuts, or occasional tickets for an entertainment event. A low-value holiday gift, such as a turkey or ham, also typically qualifies, provided it is not a form of disguised compensation.

Certain items are excluded from being de minimis benefits, regardless of their value. Cash payments and cash equivalents, such as gift cards redeemable for general merchandise, are never excludable and are treated as wages. Similarly, providing employees with season tickets to sporting or theatrical events or the use of company-owned assets like an apartment or vehicle would not qualify as a de minimis benefit.

If a benefit’s value is too high to be considered de minimis, its entire value becomes taxable to the employee, not just the amount over a certain threshold. The IRS has indicated that items valued over $100 are unlikely to be considered de minimis, reinforcing that while there is no set dollar cap, there is an expectation of minimal value.

Using the De Minimis Safe Harbor for Business Property

When purchasing property, businesses must either expense it or capitalize it. Expensing allows an immediate deduction, while capitalizing spreads the deduction over several years through depreciation. The tangible property regulations provide a de minimis safe harbor (DMSH) that permits businesses to expense certain low-cost property acquisitions that would otherwise be capitalized.

The safe harbor has two thresholds. A business with an Applicable Financial Statement (AFS) can use a $5,000 per-item, per-invoice limit. An AFS is a certified audited financial statement or one filed with a government agency. For businesses without an AFS, the limit is $2,500 per item or per invoice.

The rule is applied on a per-item or per-invoice basis. For instance, if a business without an AFS receives an invoice for three items costing $2,000 each, the entire $6,000 invoice total exceeds the threshold. However, because each item’s cost is below the $2,500 limit, the business can still expense each item individually. If a single item costs more than the applicable limit, no portion of its cost can be deducted under this safe harbor.

Documentation and Making the Safe Harbor Election

To use the tangible property safe harbor, a business cannot simply start expensing items. It must make a formal election annually by attaching a statement to its timely filed federal tax return for the year the election is effective.

The statement must be titled “Section 1.263(a)-1 de minimis safe harbor election.” The document must include the business’s name, address, and Taxpayer Identification Number, along with a clear declaration that the taxpayer is making the election. This election is binding for all qualifying expenditures during the tax year; a business cannot selectively apply it.

A business must have an accounting policy in place at the beginning of the tax year. This policy should state that the business expenses property acquisitions below a certain dollar amount or with a useful life of 12 months or less. For businesses with an AFS, this policy must be in writing. For those without an AFS, a written policy is not required but is a best practice.

For the tangible property safe harbor, businesses must keep invoices that clearly show the cost per item. These records serve as proof that each expensed purchase falls below the applicable $2,500 or $5,000 threshold.