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What Is the “Safe Harbor” Rule?

Here are two questions more small business owners should be able to answer: What is the safe harbor rule? And how can it help my small business?

Back in 2013, the IRS established the de minimis safe harbor to provide small businesses with relief from certain tax and regulatory requirements.

Now it’s been ten years. If you haven’t been using it, it’s time to apply the de minimis safe harbor rule to your business.

Individuals can deduct their tangible property immediately

Here’s how it works: Typically, you capitalize depreciable property, spreading the cost over several years. The de minimis safe harbor election lets you collect the complete write-off the year you made the expense, as long as it’s under a certain dollar threshold.

The rule eases the burden on small businesses

Let’s get into the why.

The IRS acknowledges that small businesses often need more resources to comply with every rule and regulation imposed on large corporations.

With the de minimis safe harbor rule, you no longer need to determine whether every small-dollar expenditure spent to acquire or produce property is deductible or capitalizable.

There are two benefits of the rule:

  1. Tax savings
  2. Simplified record-keeping

1. Save money

Purchases falling under the de minimis threshold are exempt from taxation; this reduces your taxable income, leading to lower overall tax liability.

Remember that the limit only applies if you have an applicable financial statement (usually an audited financial statement). If you don’t have an applicable financial statement, you can use the safe harbor rule to deduct up to $2,500 ($500 prior to Jan. 1, 2016) per invoice or item.¹

So, hold onto your receipts and keep your statements in order.

2. Ease IRS compliance

You already know how difficult compliance with complex tax laws and regulations can be (although it’s easier with the help of a CPA).

The de minimis safe harbor simplifies this by providing a threshold under which certain transactions are considered too insignificant to need detailed reporting. Less administrative burden for you and other small businesses is a good thing.

Work with a CPA to maximize Safe Harbor benefits

The de minimis safe harbor rule can help your business grow by simplifying compliance and reducing the cost of small-dollar transactions.

Still have questions? I can help. I’m a Fort Worth-based CPA who specializes in helping small businesses reduce their tax liability and grow quickly.

Schedule a discovery call with us today.

Talk soon,
Jeremy A. Johnson, CPA

References

  1. Tangible property final regulations [Internet]. Irs.gov. [cited 2023 Sep 27]. Available from: https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations
Meet the Author
Jeremy A. Johnson, CPA, is an expert in strategic tax planning, accounting, CFO services, and thought leadership.

Jeremy writes for small business owners who need actionable information on tax strategy, efficient accounting practices, and plans for long-term growth.

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