What is 'Safe Harbor'
Safe harbor refers to a legal provision to reduce or eliminate liability in certain situations as long as certain conditions are met. Safe harbor also refers to a shark repellent tactic used by companies who do not want to be taken over, where they purposefully acquire a heavily regulated company to make themselves look less attractive to the entity considering taking them over. The phrase "safe harbor" appears in the finance, real estate and legal industries in a number of different ways.
BREAKING DOWN 'Safe Harbor'Safe harbor can also refer to an accounting method that avoids legal or tax regulations or one that allows for a simpler method of determining a tax consequence than the methods described by the precise language of the tax code.
Safe Harbor Accounting Method to Simplify Tax Returns
Typically, the Internal Revenue Service (IRS) requires taxpayers to treat remodels as capitalized improvements, the value of which generally must be claimed slowly over a long period of time. However, restaurants and retailers often remodel their facilities on a regular basis to help their businesses look fresh and engaging. As a result, the IRS has allowed some restaurateurs and retailers the ability to claim these expenses as repair costs, which could all be deducted as business expenses in the year they are incurred.
Because of this, tax filers had to review a long list of requirements to determine into which category their expenses fall, and the process was confusing. To eliminate confusion, the IRS created a safe harbor accounting method for eligible retail and restaurant businesses. Essentially, these businesses can now choose if their remodeling costs fall into the repair or capitalized improvement categories. Due to this safe harbor, businesses don't have to worry about accidentally making the wrong selection and later being penalized for it.
Safe Harbor Provisions
Safe harbor provisions appear in a number of laws or contracts. For example, under SEC rules, safe harbor provisions protect management from liability for making financial projections and forecasts in good faith. Similarly, individuals with websites can use a safe harbor provision to protect themselves from copyright infringement cases based on comments left on their websites.
Safe Harbor Accounting Method to Sidestep Tax Regulations
To illustrate a safe harbor accounting method that helps a tax filer sidestep a tax regulation, imagine a firm is losing money and therefore cannot claim an investment credit, so it transfers the credit to a company that is profitable and can therefore claim the credit. Then the profitable company leases the asset back to the unprofitable company and passes on the tax savings.
Safe Harbor 401K Plans
Safe harbor 401K plans feature simple, alternative methods for meeting discrimination requirements. Created by the 1996 Small Business Job Protection Act, these retirement accounts were created in response to the fact that many businesses were not setting up 401Ks for their employees because the non-discrimination policies were too difficult to understand. These 401Ks give the employer safe harbor from compliance concerns by providing them with a simplified product.