Every business buys items that technically have a useful life of more than a year: a printer, a chair, a power tool. Without a simplifying rule, each would need to be capitalized and depreciated. The de minimis safe harbor, part of the IRS tangible property regulations, lets businesses expense many of these items immediately.

The limits

Under the safe harbor, a business can deduct amounts paid for tangible property up to a per-invoice or per-item limit:

  • $2,500 per invoice or item for taxpayers without an applicable financial statement, which covers most small businesses
  • $5,000 for taxpayers with an applicable financial statement, generally an audited financial statement or one filed with a government agency

The limit applies per item or per invoice, not per year. A business buying ten laptops at $1,200 each can expense all of them if each item is substantiated by invoice at or below the limit.

Accounting policy requirement

To use the safe harbor, a business should have an accounting procedure in place at the beginning of the year treating amounts below a set threshold as expenses for non-tax purposes. For businesses without an applicable financial statement, the policy does not need to be written, but writing it down is good practice. We add a one-line capitalization policy to every client's year-end file.

Making the election

The election is made annually by attaching a statement to a timely filed original return, including extensions. It is not made by filing a separate form, and it applies to all qualifying amounts for that year; you cannot pick and choose items.

What it does not cover

  • Inventory and land
  • Items that are part of a larger asset, such as components of a building improvement that must be capitalized together
  • Amounts above the limit, which are capitalized and depreciated, possibly with other elections such as section 179

For larger purchases, see our guide to depreciation.

In your bookkeeping

We set a capitalization threshold in the chart of accounts. Purchases at or below it go to small equipment or supplies; purchases above it go to fixed assets. The year-end package then lists fixed asset additions separately, which is what your preparer needs. See how to set up a chart of accounts for account structure and our accounting services for year-end support.

Why it matters

Beyond the tax deduction, the safe harbor keeps your fixed asset register free of hundreds of small items that nobody will track, making the register reliable for the assets that matter.

Recording small purchases under the safe harbor

Once the policy and election are in place, bookkeeping becomes simpler. Purchases at or below your threshold go to expense accounts such as supplies or small equipment, while items above it go to fixed assets. Keep the invoice for each purchase, since the threshold generally applies per invoice or per item as substantiated by the invoice. Review the fixed asset account each year to confirm that nothing below the threshold was capitalized by mistake.

Key terms

Definitions for terms used in this guide, from our small business glossary:

  • Assets: Assets are resources a business owns or controls that are expected to provide future economic benefit.
  • Tax Credit vs Tax Deduction: A deduction reduces taxable income; a credit reduces the tax itself, dollar for dollar.
  • Chart of Accounts: A chart of accounts is the organized list of every account a business uses to record transactions in its general ledger.
  • Depreciation: Depreciation spreads the cost of a long-lived business asset over the years it is used, rather than deducting it all at once.