The De Minimis and Routine Maintenance Safe Harbors

These three examples involving the replacement of windows give useful insight into what the IRS views as a major component and substantial structural part . It is clear that windows are considered a major component of a building and can be a substantial structural part of the building . But what is important to note about these examples is whether a “ significant portion ” of the major component or substantial structural part has been replaced .

Example 25 illustrates when there is not a replacement of a major component or a substantial structural part . In it , a building has 300 windows that comprise only 25 percent of the surface of the building , and 100 out of the 300 windows were replaced . The example states that 25 percent of the building structure is not a substantial structural part of the building structure .

Further , while the windows perform a discrete and critical function in the operation of the building structure and are a major component of the building structure , 33 % of the windows does not comprise a significant portion of this major component . The cost of the window replacements therefore can be expensed .

In contrast , Example 26 shows that 200 out of 300 windows ( approximately 67 percent ) is considered a significant portion of the major component , and therefore the cost of replacing 200 of the windows must be capitalized .

Example 27 illustrates a unique scenario where the windows would need to be capitalized . According to the example , the 300 exterior windows , which represent 90 percent of the total surface area of the building , perform a discrete and critical function in the operation of the building structure and are , therefore , a major component of the building structure .

However , the 100 windows replaced do not comprise a significant portion of this major component of the building . The example states that they do , however , comprise a substantial structural part of the building structure .

Even though only 100 out of the 300 windows were replaced ( approximately 33 percent ), the windows replaced comprise a significant portion of the of the building structure . Thus , the amount paid to replace them must be treated as a restoration that must be capitalized .

None of these percentages in the examples are part of the actual regulations . However , these examples show that there is room for interpretation as to what constitutes a significant portion of a unit of property while also providing some guidelines .

Two Indispensable Safe Harbors The de minimis safe-harbor election can simplify the decisionmaking process and provides more certainty for immediately expensing certain items , subject to dollar limitations . This method can save both time and administrative burden . However , it is crucial to remember that this election does not apply to land , inventory , or certain specialized spare parts ( Regs . Sec . 1.263 ( a ) -1 ( f )( 2 ).

On the other hand , the safe harbor for routine maintenance provides a broader ability to expense costs incurred to maintain property , so long as the property ’ s value is not enhanced . It may require filing Form 3115 for a method change , but this is relatively simple .

The “ routine ” aspect of the maintenance is open to interpretation , so it is important to discuss this with your client to determine the best course of action .

The question of whether an expense must be capitalized or can be expensed is a critical issue that often perplexes CPAs and taxpayers alike . However , the de minimis and routine maintenance safe harbors are at the disposal of taxpayers and their advisers to help address this quandary .

These two essential safe harbors offer distinct approaches in addressing this dilemma and will help taxpayers navigate the complex maze of the repair regulations . They provide tax advisers with the means to make informed decisions and better serve their clients .

As the tax landscape evolves , this knowledge will prove indispensable , ensuring tax professionals are well prepared to handle repair expenses with confidence .

Nicholas Galletta , CPA is a tax manager at Navolio & Tallman LLP and Celia Lau , CPA is a partner at Navolio & Tallman LLP . You can reach them at ngalletta @ ntllp . cpa and CLau @ ntllp . cpa . Reprinted with permission from The Tax Adviser .

Sample de minimis Expensing Policy

1 . Purpose This accounting policy establishes the minimum cost ( capitalization amount ) that shall be used to determine the capital assets to be recorded in our books and financial statements .

2 . Capital asset definition and thresholds A “ capital asset ” is a unit of property with a useful life exceeding one year and a per-unit acquisition cost exceeding $ 2,500 /$ 5,000 *. Capital assets will be capitalized and depreciated over their useful lives . We will expense the full acquisition cost of tangible personal property below these thresholds in the year purchased .

3 . Capitalization method and procedure All capital assets are recorded at historical cost as of the date acquired . Tangible assets costing below the aforementioned threshold amount are recorded as an expense for our annual financial statements ( or books ). In addition , assets with an economic useful life of 12 months or less must be expensed for both book and financial reporting purposes .

4 . Documentation Invoices substantiating the acquisition cost of each unit of property are to be retained for a minimum of seven ( 7 ) years .

* Tax capitalization threshold : The permissible ceiling for deducting otherwise capitalizable expenditures is $ 5,000 when our business has applicable financial statements . The threshold is limited to $ 2,500 in the absence of applicable financial statements .

Signature Date www . calcpa . org OCTOBER 2024 CALIFORNIA CPA 15