Expense or depreciate small business purchases?Expense or depreciate small business purchases?
Tough Decisions: The de minimis safe harbor election allows for the immediate expense of purchases of $2,500 or less.
October 17, 2018
By Austin Duerfeldt
When preparing farm taxes, the following question often arises, "When do I depreciate vs. expense?" For high-dollar assets, most taxpayers know to depreciate the item. What about smaller-dollar items? Where is the line here?
Think of assets such as a new computer, a grain moisture tester or a single-axle utility trailer. Those examples are all assets that are used for multiple years of production, but could cost under $2,500. If you read the Farmers Tax Guide, IRS Publication 225, it would lead you to believe these items should be depreciated over time. There is a way, however, to bypass all the depreciation rules and simply expense these costs as supplies, if they cost $2,500 or less.
Under Code Section 263 of the Internal Revenue Code, taxpayers can elect the "de minimis safe harbor" on a yearly basis. This election allows assets costing $2,500 or less to be listed as an expense rather than a depreciable asset.
De minimis safe harbor
The de minimis safe harbor election allows for the immediate expense of purchases of $2,500 or less on a per invoice or item basis (as substantiated by invoice).
If you bought 100 12-by-6-foot cattle panels at $80 a panel on the same invoice, the total invoice amount was $8,000, which is well above the $2,500. Remember, that it is a per invoice or item basis. Each panel was only $80. Instead of depreciating out the panels, if you have elected the de minimis safe harbor, you qualify to expense it in supplies.
What about a different approach. What if you bought a used ATV that was paid for on two different invoices? Invoice No. 1 was a $1,800 down payment. Invoice No. 2 was $3,000 due upon delivery. This example goes back to the per item basis. While it is on separate invoices, the total paid for the asset was $4,800, thereby being higher than the election limit allows.
This asset needs to be depreciated. When figuring up the cost of an asset, don't forget to include charges such as freight and setup fees that were incurred getting the asset in your possession and ready for use.
Note that this is an election, and the election statement must be included with your timely filed federal income tax return each year. The statement filed with your return will be titled as Section 1.263(a)-1(f) De Minimis Safe Harbor Election, and will list the taxpayer's information and decision to operate under the election.
One note of interest, this is made at the entity level. For those that are part of an S corporation or a partnership, the election is made by the S corporation or partnership, not at the level of each individual shareholder and partner.
Making record keeping easy
The de minimis safe harbor is a great way to simplify record keeping. As farm and ranch operations continue to grow, so does the list of assets and tools within the operation. Depreciation schedules can get complicated.
Remembering which of your GPS monitors were sold and replaced can turn into a guessing game. By using this election, you can simplify your asset list and reduce future headaches. Check with your tax preparer to ensure this election is being made each and every year if it helps your operation.
Duerfeldt is a Nebraska Extension agricultural economist educator. Reach him at 402-873-3166.
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