The Small Tax Payer Safe Harbor, along with the Routine Maintenance Safe Harbor, are two of the most misunderstood administrative conveniences of the Tangible Property Regulations (263a). Yet, both are amazing opportunities.
Benefits of the Small Taxpayer Safe Harbor
The Small Taxpayer Safe Harbor (STSH) allows a property owner to expense up to two percent of the unadjusted basis (up to $10,000) of each building every year. This is not deemed but must be elected every year.
The most misunderstood portion of the STSH is that each building – if it is a single unit of property – can utilize the STSH. For example, if a multi-family complex owner has ten buildings which are all unattached, he has ten units of property. Each unit of property can utilize the two percent or $10,000 rule every year.
Calculating the Small Taxpayer Safe Harbor
It is very simple to calculate the unadjusted bases of each building. It can be done in any reasonable manner, including taking the square footage of each unit of property and comparing it to the total square footage of the complex and dividing that number by the unadjusted basis of the entire complex. Also, any exterior improvements do not count towards the two percent. An owner must be careful, however, not go over the two percent. Even an expenditure of one dollar more than the limit will be disallowed by the Service.
Surprisingly, many building owners across the United States have not even heard of this opportunity. It is a phenomenal strategy not only to take the full expense of building repairs but also to reduce capital gains upon the sale of the property.
By: Kevin Jerry, Executive Vice President