Taxpayer-friendly safe harbors are easy ways to delight your clients!
Are you so busy solving complex tax problems that you miss low-hanging fruit right in front of your nose? A number of expanded safe harbors under the new tangible asset regulations represent some simple ways to increase tax savings while achieving compliance—especially for your smaller owners of residential and commercial real estate.
Before you move on to higher-value opportunities for tax minimization, take a look at these three opportunities to save your clients taxes while protecting them from the taxman.
Don’t Miss the De Minimis Safe Harbor Election
Almost every client can benefit from taking the de minimis safe harbor, which now is applied at the invoice or item level (instead of in aggregate). The final tangible asset regulations also removed the ceiling on the de minimis safe harbor election.
Here are the facts: Any taxpayer with an applicable financial statement (AFS) and written accounting procedures that it follows may deduct up to $5,000 per item or invoice for amounts paid to acquire, produce or improve tangible property—without limit. The final regs also allow clients without an AFS to deduct amounts paid up to $500 per invoice or item, if the taxpayer has accounting procedures that it follows and treats those expenses accordingly. (Note that the accounting procedures for these smaller taxpayers do not have to be written.)
The removal of the ceiling and expansion to include clients without an AFS opens up significant opportunities for you to delight your clients with increased tax deductions. And taking refuge under this safe harbor provides you and the taxpayer with a layer of protection if the IRS comes calling.
More Opportunities to Deduct Materials and Supplies
Every commercial property owner has materials and supplies, and now they can deduct even more of those routine items.
The facts: The final tangible property regulations increased the limit for treating an item as a material or supply to $200 (up from $100 under the temporary regs), which means those espresso makers and deluxe nameplates are now fair game. The final regs also retained the 12-month rule, which says that an item with an economic useful life of 12 months of less can be deducted.
The result? Even more tax-minimization opportunities to delight your clients!
Shield Your Small Taxpayers
We all have those clients with just one or two small rental properties. The small taxpayer safe harbor was designed just for these clients, shielding them from having to capitalize costs paid or incurred for repair, maintenance or improvement of building property.
The facts: Owners of buildings with an unadjusted basis of $1 million or less and who generate average annual gross revenue of $10 million or less can deduct any costs paid or incurred for the repair, maintenance or improvement of building property—up to $10,000 or 2% of the building’s unadjusted basis, whichever is less.
Because this election is taken on a building-by-building basis, it represents significant flexibility for commercial or residential real estate owners with multiple smaller properties—which means more ways to reduce taxable income and increase cash flow. The upshot is that if you have these Schedule E property-owners on your client list, the small taxpayer safe harbor will save them money and protect both of you in the event of an IRS audit.
These expanded safe harbors are the tax regulators’ way of shielding taxpayers (especially small businesses) from the hardships that the tangible property regulations might otherwise impose on them. Make sure that you are looking out for your clients’ best interests by taking advantage of every opportunity to reduce their taxable income and protect them in the event of an audit.
CSP360 can help you delight your real estate clients by finding opportunities to save them money while bringing them into compliance with the tangible property regulations. Contact us to talk about how we can partner to delight your clients through services such as fixed asset reviews and capitalization vs. expense consulting.