NEWS
Ask the Taxman by Andy Biebl
Andy Biebl DTN Tax Columnist
Wed May 27, 2015 01:13 PM CDT
(Page 1 of 2)

QUESTION:

Before depreciating tile on a new land purchase, ask a third-party for a fair valuation. Otherwise, IRS can challenge your "ball park" estimates. (DTN file photo by Chris Clayton)

On a new purchase of farm land, is it possible to carve out the cost of recent improvements and depreciate them? More specifically, can we depreciate the cost of tile and risers used to drain water collected in terrace channels and the cost of installation of this tile? I see in IRS Pub 225 that field drainage tile qualifies for depreciation. The exact amount of cost might be difficult to determine, but it would seem reasonable to allocate part of the total cost of the land purchased to the tile system. We understand the cost of earth-moving to build terraces would not be depreciable.

ANSWER:

Drainage tile is a depreciable asset. It is within Asset Class 00.3 of Rev. Proc. 87-56, and can be depreciated over 15 years. The problem, as you suggest, is one of valuation. What is the reasonable allocation of your purchase price to the fair market value of that tiling, given its age and condition? There is likely some fact-finding that is necessary to determine how many feet of tiling are in the ground and what is the approximate age of each of the past tiling improvements, and what type of improvement was made (concrete tile, clay, or plastic?).

I have seen IRS agents adjust a farmer's depreciation schedule where an aggressive "ball park estimate" was placed on the value of tiling. It is best to get a third-party, such as a tiling installer or someone with expertise, to estimate the current cost of what tiling is present, and then apply an appropriate discount for the age and condition, considering the economic useful life of each particular tiling improvement. The better your evidence for how you came up with your allocation of value to the tiling, the better the chance of sustaining the depreciation deduction in the event of an IRS exam.

The other side of this story is the seller has depreciation recapture (i.e. ordinary income, not capital gain), equal to the lesser of the prior depreciation claimed on this tiling or the tax gain attributable to the tiling. The buyer and the seller are not required by the tax law to coordinate the allocation to the tiling improvement, assuming that it is a land sale only and not a sale of a full, going concern business. However, if the sale is within the family, such as dad to junior, the IRS is going to expect coordination of the allocation. And if the sale is to an unrelated party, it is also prudent to reach agreement on the allocation, to defend both tax returns against an IRS adjustment.

***

QUESTION:

Our small organization provides a group health insurance plan for employees. The spouse of one employee is retired from a large school district and is part of the group health plan for that school district, but she has to pay for the insurance out of her pocket. Can our organization reimburse the employee for the cost of her health insurance with pre-tax dollars?

ANSWER:

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