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How to Use the Safe Harbor Election for Capital Expenditures

Posted by Marty Williams, CPA on Dec 16, 2016 8:37:16 AM

iStock-513594346-091517-edited.jpgDoes your manufacturing company plan to purchase equipment or machinery early in 2017? If so, it is worth considering the timing of when you purchase that equipment for the best tax savings. It all has to do with something called the de minimis safe harbor election.


Taxpayers must typically capitalize amounts paid to buy or produce tangible property. However, there is a section of the U.S. tax code called the de minimis safe harbor election. The safe harbor elections allows certain amounts paid to acquire or produce tangible property to not be capitalized. Rather, they can be deducted in the year of purchase. Further, taxpayers can use the de minimis safe harbor election to expense certain business assets purchased and placed into service during the year instead of depreciating them over several years. Eligible property includes low-cost materials, supplies, and equipment.


There are two important exceptions to note. Costs incurred during the pre-production, pre-sale and actual production period must be capitalized. Examples include direct materials and direct labor. Other ineligible property for the de minimis election include property that is included in inventory, land, and temporary or spare parts. However, we’ll come back to these exceptions in the next section, which addresses the Section 179 tax provisions.

How De Minimis Works with the Section 179 Depreciation Deduction

The Section 179 depreciation deduction addresses how much depreciation a business can deduct in the first year it acquires property. For 2016, this deduction is limited to $500,000. However, with the de minimis safe harbor election, there is no limit to how much the taxpayer can deduct. So, by using this election, you could greatly benefit from expensing certain business items well in excess of Section 179 limitations. Better yet, these assets are not included in determining the Section 179 expense.

Additionally, remember the property that is ineligible for the de minimis safe harbor? You can elect Section 179 deductions on these assets and still apply for the de minimis election on assets that are allowed to be expensed. Note: Assets expensed under the de minimis election are not included in determining the Section 179 expense.

If you plan to make a capital expenditure during the year that meets the de minimis safe harbor criteria, you just may want to make that purchase before year-end to take full advantage of the safe harbor election.  For assistance with determining which course is best for your business, please contact Marty Williams, CPA by calling (334) 887-7022 or by leaving us a message below.

Topics: Business Tax

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