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?

[Account Closed]

Thanks all.  I'm going to keep working on this. Out of the country for a few weeks, but I've already filed my tax extension and have till September now to figure this out

[Steven Hamilton II]

Originally posted by @Account Closed:

Thanks all.  I'm going to keep working on this. Out of the country for a few weeks, but I've already filed my tax extension and have till September now to figure this out

 A cost segregation study would probably benefit you quite well.   A great way to accelerate depreciation.  

[Stephen Anthony]

Resurrecting this thread because the previous answers actually cited the regs, and there was some great discussion and information. I'm in search of a couple clarifications on de minimis safe harbor (DMSH) and specifically sources for those opinions.

Assuming:
1) The real property is in service
2) Items in question are below $2500 and not subject to the anti-abuse rule
3) Books for the business consistenly demonstrate corresponding DMSH treatment
4) Any other key assumption I probably didn't realize (feel free to point it out)

Questions:

1) Do materials/supplies still qualify if they are for a betterment or improvement? Source? (Example: 20 new light fixtures, Example: Vinyl plank flooring for two previously unfinished rooms)
2) Do labor expenses or combined labor/materials qualify under DMSH? Source? (Example: Install a new egress window, Example: Convert a dining room to a bedroom)
3) Does DMSH exclude structural components or any other parts of a building, either from a materials or labor perspective? Source?
4) Realize this may be a much larger question, but at a high level do Tangible Property regs and UOPs have anything to do with DMSH when we are talking about improvements to real property?

My examples are made up, feel free to change them if it better illustrates the answer.

Easy links for possible sources:

§ 1.167(a)-11 - Placed into service definition - e(1)(i)

§ 1.263A-1 - Capitalization of real property

§ 1.263(a)-1 De mimimis safe harbor (DMSH)

§ 1.263(a)-2 - Treatment of tangible property

IRS Tangible property and DMSH FAQ

Thank you in advance!!

[Account Closed]

Again, I'm not an accountant, but the way it was explained to me is the purpose of a safe harbor is you satisfy the safe harbor and then you get to stop.  You don't have to keep running rules after that.

So unless the safe harbors specifically excludes anything, as long as it's below $2500 per item including labor, then it's deductible.

[Lesley Resnick]

It was recommended to me that I stay below 50% of all reno costs for purposes of tax deductions. In theory, I could probably go beyond 50% between repairs, de minims, and accelerated depreciation.  I am not interested in pushing past the commonly held approach.  Walk up to the line and stop.  

I do appreciate the lively conversation and questioning of where the line actually lies.

[Stephen Anthony]

IRS Tangible property and DMSH FAQ

I'm going to throw out a few potential answers to my first two questions, all sources from the IRS Tangible Property Regulations FAQ (above), oddly enough.

1) Under "What is the de minimis safe harbor election?"

"The de minimis safe harbor election eliminates the burden of determining whether every small-dollar expenditure for the acquisition or production of property is properly deductible or capitalizable. If you elect to use the de minimis safe harbor, you don't have to capitalize the cost of qualifying de minimis acquisitions or improvements." 

As the IRS specifically mentions improvements here, that seems to say that materials/supplies can be expensed even if they're for improvements.

2) Same source and paragraph as above, specifically "acquisition or production of property". Production implies the involvement of labor. You don't produce a table just buy buying a pile of lumber.

Additionally under "If you use the de minimis safe harbor, do you have to capitalize all expenses that exceed the $2,500 ($500 prior to 1-1-2016) or $5,000 limitations?" it mentions both "repair and maintenance" and again "production of property", again implying labor costs.