When you purchase lower-cost assets for your business, you might be able to write off the amount on your tax return to simplify your bookkeeping and taxes.

A fun shortcut to help you with tax deductions for fixed assets is called the de minimis safe harbor election. The IRS has guidance in place that determines whether the amount you pay for tangible assets would be considered a amount too small in the eyes of the law. If it is, you may take that amount as a tax deduction, also known as a tax write-off.

We’ll discuss fixed assets, so you know what purchases are acceptable under the de minimis rule; capitalization, so you know how the de minimis rule bypasses it; and the maximum amounts you can spend to stay within the de minimis safe harbor.

What are fixed assets?

The de minimis safe harbor rule applies to fixed assets for your business. Fixed assets are tangible and help generate business income for at least a year. They’re also called long-term assets, non-current assets, or capital assets, because they represent a longer-term financial commitment.

Property, plant, and equipment (PP&E) is shorthand for the kinds of purchases that would often be considered fixed assets. For your business, a fixed asset might be a computer, a piece of machinery, a vehicle, or a storage building that you purchase.

These are in contrast to “current assets,” which are generally liquid or easily sellable, such as cash or your inventory. The de minimis rule doesn’t apply to current assets.

What is capitalization?

When you own a fixed asset, it generally depreciates over time. Think about the purchase of a new laptop to run your business. When you buy it, it might cost $1,200, and you expect it to last several years. However, each year that you own the laptop, it loses value.

Generally accepted accounting principles (GAAP) indicate that a business should recognize a fixed asset expense on the balance sheet when it is purchased. The business then needs to include the fixed asset as part of its capital every year that asset is being used, while adjusting for its depreciation. You’re able to write off the depreciated cost in your taxes each year. This process is called capitalization.

How to apply the de minimis rule, including maximum costs

The de minimis safe harbor rule lets you skip capitalization for amounts that, in the IRS’ eyes, are considered to be trivial. Instead, you may recognize the expense in your books, take a deduction from that year’s taxes, and not worry about tracking the item’s depreciation in the future.

The upside is that you simplify your bookkeeping. The downside is that you can’t write off the depreciated cost in future years. However, the idea is that the amount is nominal enough that the future write-offs aren’t worth the time to track fixed assets and their depreciation amounts.

The first consideration is whether you have a receipt or invoice, known as an applicable financial statement or AFS. That affects what the cap on your safe harbor is going to be. Here’s how you can determine your de minimis safe harbor cap for deductions:

●      Without an AFS: $2,500 maximum

●      With an AFS: $5,000 maximum

With your documentation, if you have it, and a purchase price below the safe harbor limits, you may treat your fixed asset purchases like an ordinary, necessary business expense. They are automatically deductible on your taxes!

Get guidance on how the de minimis rule applies to your business

It’s totally normal to have questions about how your fixed assets depreciate, how the de minimis rule works, and whether your purchases fall into the de minimis safe harbor. If you’re still feeling a bit lost, Certum Solutions can help. Set up some time to talk with our team or send me an email — without pressure or commitment. We’d be happy to guide you!