What Is a Safe Harbor Law?

A safe harbor law states that certain types of behavior are not considered violations as long as they fall under a given rule. Rule 10B-18 of the Securities Exchange Act of 1934 defines safe harbor laws. As such, safe harbor laws offer protection when people show "good faith" efforts.

For example, if the law makes property owners report their land dimensions, landowners can't receive fines if they use surveyors or a faulty measuring tool. The landowners act in good faith without knowing about inaccuracies with the measurements. Otherwise, state law can fine landowners up to $500 for each under-reported acre. The fine amount depends on the property owner's location.

Safe harbor laws can be used in many legal areas, including:

  • Environmental laws
  • Tax laws
  • Sex trafficking laws
  • Copyright laws (as stated under the Digital Millennium Copyright Act )
  • Securities laws
  • Healthcare (the Affordable Care Act includes a safe harbor designed to make employee healthcare coverage affordable)
  • Another safe harbor provision is the IRS Special Accounting Rule. This rule enables employers to treat noncash fringe benefits provided in November or December as being offered in the following tax year.

Changes in Safe Harbor Law

Safe harbor laws were recently changed to increase limits for small businesses taking tax deductions for personal property within a purchase year. This change has been helpful, as it allows small-business owners to receive greater expense deductions.

Previously, the safe harbor regulations required applicable financial statements to prove deductions. Since 2016, however, business owners can take up to $2,500 in deductions for property, including smartphones, tablets, equipment, and machinery.

Why Are Safe Harbor Laws Important?

Safe harbor laws protect people and businesses from being responsible for unforeseen mistakes. These laws give peace of mind to anyone acting in good faith who may otherwise be violating the law for reasons out of their control.

Safe harbor, by another definition, is also a shark repellent tactic used by businesses to avoid being purchased outright. Business owners can buy heavily regulated companies to make themselves look like less attractive options. The term can also refer to an accounting method which simplifies the process of figuring out tax issues.

The Safe Harbor Account Method Can Simplify Tax Returns

The Internal Revenue Service (IRS) requires business owners to treat renovations as capitalized improvements. The value of these improvements must be claimed over a time period. However, most retailers and restaurants need to be remodeled often to keep the facilities looking fresh. As such, the IRS allows certain business owners to claim remodeling expenses as repair costs under the safe harbor accounting method. This method allows all purchases to be deducted during the same year.

Since figuring out tax expenses could be confusing for businesses owners, the IRS created a safe harbor accounting method for qualifying businesses. Business owners no longer have to worry about making the wrong decisions when tax time arrives and later receiving penalties.

On the other hand, safe harbor accounting can help businesses get around tax regulations:

  • If a business loses money and can no longer claim an investment credit, that business can transfer the credit to a profitable company. When this transfer occurs, the business can claim credit. The profitable company then leases the asset back to the original company, passing on tax savings.

Safe Harbor Helps Meet Discrimination Requirements for 401(k) Plans

Safe harbor laws associated with 401(k) plans offer different methods for meeting discrimination requirements. Safe harbor 401(k) plans became created in 1996 under the Small Business Job Protection Act. These retirement accounts were needed because many companies were not setting up 401(k) accounts for employees.

The reason for this intentional oversight was because nondiscrimination policies were difficult to understand. Safe harbor 401(k) plans keep employers safe from compliance issues by giving them a simpler product to work with for their employees.

Reasons to Consider Using a Safe Harbor Law

Safe harbor laws protect people who may be unaware they are committing legal violations. As such, your attorney might refer to safe harbor law if you or your business has unintentionally made a mistake resulting in legal consequences. When you can claim protections under safe harbor law, you won't face costly fines.

International Safe Harbor Frameworks

With privacy law compliance, Safe Harbor Certification was often the first step for U.S.-based startups. These safe harbor arrangements were related to data transfer between the European Union and the United States.

  • Businesses that wanted to take advantage of safe harbor laws could join the United States-European Union (EU) Safe Harbor. However, the U.S. Department of Commerce stopped accepting applications for Safe Harbor Certification on Oct. 31, 2016. The reason stated was that the United States wasn't doing its part to protect the data of EU companies and citizens associated with U.S. companies. This case was one of the few examples where safe harbor became removed.

However, the Swiss-U.S. Privacy Shield Framework received approval on Jan. 12, 2017. It replaced the U.S.-Swiss Safe Harbor. The U.S. Department of Commerce will begin accepting applications for the Safe Harbor Privacy Shield on April 12, 2017.

A Safe Harbor program like this one allows companies to self-certify compliance within the Safe Harbor Framework. To join, your business or organization must abide by policies outlined by the Framework. Review the self-certification information and complete the online certification form.

Frequently Asked Questions

  • If I make a purchase to comply with safe harbor laws, does that action protect me from all liability?

Not necessarily. Some purchase activities meet safe harbor conditions, but others can still violate the anti-manipulation and anti-fraud rules of the Exchange Act. Safe harbor provisions are not available if a purchase is fraudulent or manipulative in any way. For example, safe harbor is unavailable if a business is part of a scheme to influence a company's closing price.

Section 530 of the IRS Code includes a safe harbor allowance for classifying workers as independent contractors. Under this provision, your company is not liable for employment taxes as long as you can show a reasonable basis for treating workers as contractors.

  • What are the safe harbor rules under the Digital Millennium Copyright Act of 1998?

The Digital Copyright Act of 1998 includes four safe harbor provisions:

  1. Transitory digital network communications
  2. System caching
  3. Information on networks or systems aimed at users
  4. Information location tools

Each of these provisions covers an aspect of internet operation that Congress wanted to protect.

  • I have a home office. Can I take advantage of safe harbor laws at tax time?

In 2013, the IRS gave taxpayers an optional safe harbor method for calculating business expense deductions. The method allows self-employed professionals to multiply their allowable square footage by $5 (up to 300 square feet) to figure out the home office deduction. With safe harbor laws in place, the maximum safe harbor deduction is $1,500.

Get Help Understanding Safe Harbor Laws

If you need legal help with safe harbor provisions, post your question on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies such as Google, Menlo Ventures, and Airbnb.