As people in business for themselves, we have the opportunity to reduce our taxable income by deducting our business property, one of those ways is the De Minimis Safe Harbor Rule. I have mentioned it here and there but I think it is about time we went into detail on how it works!
So in this article, We are talking about:
EVERYTHING You MUST Know about the De Minimis Safe Harbor Rule
What this does and DOES NOT account for
Everything in between!
Disclaimer: The content of this article does not contain and is never intended to be legal, business, financial, tax, or health advice of any kind, This article is for entertainment purposes only. It is advised that you conduct your own research and consult with qualified professionals before applying anything you find online.
Thank you to GigTax for Verifying this information and making this article possible!
What is De Minimis Safe Harbor?
The De Minimis Safe Harbor is an annual tax election that business owners and real estate investors can make when they file their returns. The election allows you to automatically expense any item under $2,500 on your invoice.
If you have an applicable financial statement (AFS), you may use this safe harbor to deduct amounts paid for tangible property up to $5,000 per invoice or item (as substantiated by invoice).
If you buy two computers for your business at $2,000 each for a total cost of $4,000, as shown on the invoice. By using the de minimis safe harbor, you can deduct the entire $4,000 expense in a single year, provided the requirements to use the safe harbor are satisfied.
This category doesn't include components acquired as part of a unit of property, such as the original engine in an automobile. Any item with an economic useful life of 12 months or less must be deducted under the de minimis safe harbor if the cost is within the de minimis limit.
So for us, if we have to get a new transmission or a new set of brakes, that would not be covered under this rule. That said, you may be able to use the expense towards a write off if you are using the actual expense method as opposed to standard deduction.
You can use the de minimis safe harbor to deduct the cost of property you don't use 100% of the time for business. Your deduction is limited to the dollar amount of your business use percentage.
Which for us this will almost always apply. Almost all the tools we use as gig workers have some sort of personal use involved, in terms of equipment that would fall under this category.
What Can't Be Deducted Under the De Minimis Safe Harbor?
This safe harbor can't be used to deduct the cost of land, inventory (items held for sale to customers), certain spare parts for machinery or other equipment, or amounts that you pay for property that you produce or acquire for resale.
So for all my resellers and thrifters out there, this will not apply to you.
What Is the De Minimis Safe Harbor Expense Limit?
The maximum amount you can deduct under the de minimis safe harbor depends on whether your business has an "applicable financial statement" for the year, such as:
a certified financial statement a CPA prepares (certified financial statements by CPAs usually cost at least several thousand dollars, and few small businesses have them) or
a financial statement, other than a tax return, your business files with the SEC or other state or federal agency (not including the IRS), such as a Form 10-K or an Annual Statement to Shareholders. Only larger corporations or businesses that are publicly traded usually file such statements.
If you don't have such a financial statement, you may use the de minimis safe harbor only for property that doesn't cost more than $2,500 per invoice, or $2,500 per item as substantiated by the invoice. (This amount was $500 in the original version of the regulation, but the IRS increased it to $2,500 effective in 2016.) If the cost exceeds $2,500 per invoice (or item), no part of the cost may be deducted by using the de minimis safe harbor.
Going back to our earlier example: you purchased two computers for her business at $2,000 each for a total cost of $4,000 as indicated by the invoice.
You have accounting procedures in place at the beginning of the year to expense amounts paid for property costing less than $2,500, and you treat the amounts paid for the computers as an expense on her books and records.
The amounts paid for the computers meet the requirements for the de minimis safe harbor, you may currently deduct the entire amount as an ordinary and necessary business expense.
If you have an applicable financial statement, then you may increase the per item or per invoice amount up to $5,000.
How to Determine the Cost of an Item
In determining whether the cost of an item exceeds the $2,500 or $5,000 threshold, you must include all additional costs that are on the same invoice with the tangible property—for example, delivery and/or installation fees.
Also, you can't break into separate components that you would normally buy as a single unit.
Now let’s say you buy a desk for your office for $3,000. You ask the store to separately bill her $250 for each of the four desk drawers and $2,000 for the rest of the desk.
However, because a desk usually includes drawers as part of a single unit, the IRS adds the cost of each component to determine that the actual cost is $3,000. So, the desk doesn't qualify for the de minimis safe harbor.
Qualifying for the De Minimis Safe Harbor
To qualify for this de minimis expensing safe harbor, a taxpayer must:
Establish before the first day of the tax year (January 1 for calendar year taxpayers) an accounting procedure requiring it to expense amounts paid for property either costing less than a certain dollar amount and/or with an economic useful life of 12 months or less, and
Actually treat such amounts as currently deductible expenses on its books and records.
If you have an "applicable financial statement" and wish to qualify to use the $5,000 de minimis limit, your accounting procedure must be in writing and signed before January 1 of the tax year.
If you don't have such a statement and qualify only for the $2,500 limit, you don't need to put your procedure in writing (although you still may do so). But it should still be in place before January 1 of the tax year.
Of course, claiming these deductions and many more, and having the paperwork to back it up means you are best off talking to a qualified tax professional to make sure your statements, paperwork and everything else is in order, which is where GigTax is here to help!
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If you would like to add some other perspective on De Minimis Safe Harbor, feel free to email me: drivenwyld@gmail.com and who knows? Maybe your email or perspective and be featured in a post as well!
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