Monday, October 6, 2014

Small Taxpayer Safe Harbor Election

The Repair Regulations put in effect on January 1, 2014, contain several elections and safe harbors.  We have previously covered the de minimis safe harbor election (, the routine maintenance safe harbor (, the capitalization election (, while this article will address the small taxpayer safe harbor election.

By now, it may appear the Repair Regulations on the surface are cumbersome and costly to many small taxpayers. In response to these concerns, the IRS implemented the Small Taxpayer Safe Harbor Election for taxpayers with average annual gross receipts of $10 million or less over the prior three years.

This Small Taxpayer Safe Harbor Election is available on buildings with an unadjusted basis of $1 million or less (i.e. generally cost). If the taxpayer leases the building, the unadjusted basis of a leased building is determined based on the total rents to be paid over the lease term, taking into account reasonably expected renewals.


Under this exception, the small taxpayer can make an annual election to expense repairs, maintenance, and improvements that are made with respect to an owned or leased eligible building property for which the total cost for the tax year does not exceed the lesser of $10,000 or two percent of the unadjusted basis of the building. The safe harbor is applied separately to each building owned or leased by the taxpayer.

If the total repair, maintenance and improvement costs for the tax year exceed $10,000 for an eligible building property, or if the unadjusted cost of the building is greater than $1 million, the election is not available for that property for that tax year. 

(Note the amounts deducted under the de minimis rule or the new safe harbor for routine maintenance is counted toward the $10,000 limit.)

The election is made annually by attaching the requisite statement to a timely-filed (including extension) original federal tax return for years beginning on or after January 1, 2014. Please contact a KOS Advisor today if you would like to discuss how this election may apply to you or the next steps needed to obtain available tax benefits under the new regulations.

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