What is a Safe Harbor Law or Provision?
A safe harbor is a provision in a law or regulation that affords protection from liability or penalty under specific situations or if certain conditions are met. (Business Dictionary.com). Sometimes a safe harbor reduces liability if "good faith" is demonstrated.
Here's a simple example of a safe harbor law: A state law requires landowners to report the size of their property. But the landowner is not penalized if he or she relied in good faith on a faulty measuring tool or a third-party surveyor.
Safe harbor as a concept is used in several areas of law, including:
- Tax laws, including provision for a Safe Harbor 401(k).
- Environmental laws
- Insider information and hostile takeovers in securities laws
- Copyright laws, specifically the Digital Millennium Copyright Act
- Sex trafficking laws.
Safe Harbor Regulations for Expensing Tangible Property
One recent change in a safe harbor law increases the limits for small businesses to expense take a tax deduction for tangible personal property (not intellectual property) in the year of purchase. This is helpful because it allows small businesses greater expense deductions. The previous regulations required "applicable financial statements" to be used to prove the deduction. As of January 1, 2016, up to $2500 in deduction per invoice for property, including tablet computers, smartphones, and machinery and equipment parts.
A recent safe harbor example
Safe harbor provisions came into the news in 2015 in relation to data transfer between the European Union (EU) and the U.S. for law enforcement purposes. This was a case in which a safe harbor provision was taken away.
The EU had previously been allowing U.S. law enforcement agencies to transfer U.S. citizens' data from the EU (the previous safe harbor provision). But the European Court of Justice ruled that this agreement was "was invalid in light of what the court deemed insufficient U.S. privacy protections." That is, the U.S. wasn't doing enough to protect the data of EU citizens and companies who are affiliates or subsidiaries of U.S. companies.
Some other examples of tax safe harbor provisions
Here are some other examples of tax safe harbor provisions:
- Section 530 of the Internal Revenue Code (IRC) includes a safe harbor provision relating to classification of workers as independent contractors. Under this provision, a company is not liable for employment taxes if it can demonstrate a reasonable basis for treating workers as independent contractors and if the employer can meet all of three reasonable basis standards. To arts and crafts professions, this safe harbor helps artists who are independent contractors.
- In another example, the new Health Care Law (the "Affordable Care Act") includes a safe harbor for affordability for employee health care coverage.
- Another safe harbor provision is the IRS Special Accounting Rule that allows employers to treat non-cash fringe benefits provided in November or December as being provided in the following year.
- In his discussion of the Domestic Production Activities Deduction, Tax Planning Expert William Perez mentions a safe harbor rule. The overall deduction is for U.S. manufacturing businesses. The safe harbor provision within this IRS regulation allows businesses to take this deduction if "at least 20 percent of the total costs are the result of direct labor and overhead costs from US-based operations." (If you want more information on this, see the article above.)
- The Digital Millennium Copyright Act of 1998 has several safe harbors. These provisions protect internet service providers (ISP's) from liability for copyright violations and other illegal activity of their customers.