For 2024, you can elect the de minimis safe harbor to expense assets costing $2,500 or less ($5,000 with audited financial statements or similar).
The term “safe harbor” means that the IRS will accept your expensing of the qualified assets if you properly abided by the safe harbor rules.
Here are three benefits of this safe harbor:
- Safe harbor expensing is superior to Section 179 expensing and depreciation because you don’t have the recapture period that can complicate your taxes.
- Safe harbor expensing simplifies your tax and business records because you don’t have the assets cluttering your books.
- The safe harbor does not reduce your overall ceiling on Section 179 expensing.
Here’s how the safe harbor works. Say you are a small business that elects the $2,500 ceiling for safe harbor expensing, and you buy two desks costing $2,100 each. On the invoice, you see the quantity “two” and the total cost of $4,200, plus sales tax of $378 and a $200 delivery and setup charge, for a total of $4,778.
Before this safe harbor, you would have capitalized each desk at $2,389 ($4,778 ÷ 2) and then either Section 179 expensed or depreciated it. You would have kept the desks in your depreciation schedules until you disposed of them.
With the safe harbor, you expense the desks as office supplies—your tax records life is easier.
There is a two-step process to benefit from the safe harbor. It works like this:
Step 1—You. For safe harbor protection, you must have in place an accounting policy—at the beginning of the tax year—that requires expensing an amount of your choosing, up to the $2,500 or $5,000 limit. I can help you with this.
Step 2— Make the election on your tax return for you to use safe harbor expensing. This is done with an election statement on your federal tax return and file that tax return by the due date (including extensions).
Keep in mind, if you want to use this safe harbor in 2024, this accounting policy needs to be in place on January 1.
Green Krist, CPA specializes in assisting taxpayers with IRS and North Carolina Department of Revenue issues in the greater Raleigh, North Carolina area.