I disagree with my accountant on interpretation of the de minimis

[Account Closed]

I dove into the IRS code today, and I think I have an airtight argument that the de minimis rule applies not only to personal property like refrigerators and computers, but also to materials and supplies used in improvements and also materials and supplies for work done on a home before it's placed in service.

Here's my reasoning:

• The rule states that its purpose is to allow the taxpayer to immediately deduct items that would otherwise be capitalized. If it doesn't apply to anything that would otherwise be capitalized, then there's no purpose for the rule.
• Second, it states as another reason for the rule that providing a safe harbor makes it easier on taxpayers because they don't have to go through the process of deciding whether an expense should be deducted or capitalized.
• Straight from the first paragraph of the de minimis section, it states that "a taxpayer electing to apply the de minimis safe harbor under this paragraph (f) may not capitalize under § 1.263(a)-2(d)(1) [Acquired or produced tangible property] or § 1.263(a)-3(d) [Requirement to capitalize amounts paid for improvements] any amount paid in the taxable year for the acquisition or production of a unit of tangible property nor treat as a material or supply under § 1.162-3(a) any amount paid in the taxable year for tangible property if the amount specified under this paragraph (f)(1) meets the requirements. "May not capitalize" is a very strong phrase. Basically, making the de minimis election requires you to immediately deduct otherwise capitalized property under § 1.263(a)-2(d)(1) and § 1.263(a)-3(d).
• In the IRS guidance, they even overtly state that they moved the de minimis section to make sure that it was obvious that it applied more broadly: "In the final regulations, the de minimis safe harbor has been moved to §1.263(a)-1(f) to reflect its broader application to amounts paid for tangible property, including amounts paid for improvements and materials and supplies"
• They also seem to make it clear that de minimis applies to almost everything that the materials and supplies rule applies to: * (f) Application of de minimis safe harbor. If a taxpayer elects to apply the de minimis safe harbor under § 1.263(a)-1(f)to amounts paid for the production or acquisition of tangible property, then the taxpayer must apply the de minimis safe harbor to amounts paid for all materials and supplies that meet the requirements of § 1.263(a)-1(f), except for rotable and temporary spare parts under paragraph (e) of this section.

If I'm right about the above, this amounts to a massive windfall for us this year and a massive reduction in record-keeping. We were looking at capitalizing almost $40,000 in improvement expenses to get our houses ready to rent.

Of the roughly $20,000 that we have put into a new house to improve it for renters, almost $17,000 of it is tangible property that qualifies under de minimis. The difference between capitalizing $20,000 and capitalizing $3000, and taking a deduction for 17,000 is pretty huge.

Also, I'll note that the small taxpayer safe harbor is completely separate from all of this stuff, and pretty unimportant because of the 2% of unadjusted basis limit. Indeed, for our $80,000 house, the limit is $1600.

So in summary, the only things that should ever have to be capitalized are:

• Contractor labor costs for improvements and preparing a house to be put in service, or if you hire a contractor and he sends you an un-itemized bill over $2500
• Materials and supplies costs for improvements and preparing a house to be put in service, only if it's over $2500.
• Personal property over $2500
• Things that don't qualify as personal property like fences and sidewalks
• Rotable spare parts

What do you think?