Safe Harbor (Generally) – Definition

Cite this article as:"Safe Harbor (Generally) – Definition," in The Business Professor, updated September 17, 2019, last accessed October 22, 2020,


Safe Harbor Definition

Safe harbor is a provision in the law that mitigates liability in specific situations in so far as the required conditions are met.

Safe harbor is also an anti-takeover tactic that companies use when they perceive an imminent hostile takeover. It is a poison pill or defense mechanism that companies use to make themselves appealing to an acquiring company. Using a safe harbor, a company averts a hostile takeover by acquiring a heavily regulated company so that it becomes less appealing for acquisition.

Safe harbor also refers to securities regulations that, if complied with, protect an actor from violating the securities laws.

In accounting, a safe harbor is an approach used by firms to minimize tax or legal regulations, it could also be used to reduce the tax obligations of a company.

A Little More on What is a Safe Harbor

Safe harbor is used in accounting and finance, real estate, businesses and in the legal industries. When used to avert hostile takeover, safe harbor is regarded as a shark repellent that will make a company avoid being forcefully acquired by another company. Examples of safe harbor used to avert hostile takeover are golden parachutes, poison pills, scorched earth policies and others. In the legal sense, safe harbor is a legal provision that minimise legal action or liability in certain situations if some requirements are met. The Securities and Exchange Commission see safe harbors as provisions that reduce regulatory liability or protect companies from such if specific requirements are met.

Here are some things to know about safe harbor;

  • Safe harbor is a strategy used by companies to foil or avert hostile takeover. It entails acquiring a heavily regulated company so that the target company will become unappealing for acquisition.
  • Safe harbor also refers to legal provisions that protect individuals and businesses from legal liabilities in specific situations if some requirements are met.
  • Safe harbor is a shark repellent which includes poison pills, scorched earth policies, and golden parachutes.
  • In accounting, safe harbor is a method that helps companies or individuals reduce their tax liabilities.

Safe Harbor 401K Plans

Safe harbor 401k plans are used by businesses who are compliant with the rules and regulations of the Internal Revenue Service. The Small Business Job Protection Act of 1996 established safe harbor 401k plans. These are forms of retirement accounts for employees that help them reduce or avoid annual compliance tests with the IRS. also, safe harbor 401k plans provide a simpler alternative for meeting certain discrimination requiremners, simplified products were provided by these plans.

Safe Harbor Accounting Method to Simplify Tax Returns

Oftentimes, businesses use the safe harbor accounting method to reduce their tax obligations. For instance, the IRS expects all remodels to be treated as capitalized improvements which they pay over a period of time. Using safe harbor, a business can remodel its facilities only to claim expenses spent on the remodelling as repair costs which will be deducted from the annual business expenses. The safe harbor created by the IRS can help eligible businesses choose where their remodeling costs fall in, whether capitalized or improvement category.

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