It’s Election Time!
No, I’m not talking about the presidential election; I’m not even talking about anything political. Did you know you must attach certain elections to your tax return to qualify for certain tax breaks? Even many tax preparers don’t understand these elections. I find them missing from most if not all the returns prepared by non-CPAs. Even the large CPA firms frequently file redundant and meaningless elections.
The following is a summary recap of three of the most common elections my clients use.
De Minimus Safe Harbor – IRS Reg Sec 1.263(a) – 1(f)
This election allows a taxpayer to deduct items of $2,500 and less rather than capitalizing them and depreciating them over their useful tax lives. Eliminates the need to track small assets on a depreciation schedule.
This election must be made each year a taxpayer wants to use it.
Routine Maintenance Safe Harbor – IRS Reg Sec 1.263(a) – 3(i)
This election allows a taxpayer to currently deduct maintenance costs, without a dollar limitation, if the maintenance will be performed again within a ten-year period. This election does not allow for the deduction of items that are classified as betterments. A betterment would be a capital improvement to the property, not just maintenance.
This election is a change in accounting method and must accompany a Form 3115, change in accounting method. The Form can be rather complicated but only has to be prepared one year.
Safe Harbor for Small Taxpayers – IRS Reg Sec 1.263(a) – 3h
This election allows a “small” taxpayer to currently deduct all expenses for repairs, maintenance, and improvements.
Each building must have an unadjusted basis of $1MM or less and the taxpayer’s total gross annual income must be less than $10MM for each of the preceding 3 years.
This election must be made each year the taxpayer wants to use it.
Neither of the previous two elections need to be made if the Safe Harbor for Small Taxpayers is elected.
There are numerous other elections that may need to be made depending on your specific situation. Contact us if you would like for us to review your return for missing or inappropriate elections.