Ask the Taxman by Andy Biebl

Spare Us From IRS Repair Regulations

New IRS regulations on justifying repairs versus capital improvements won't necessarily require a change in accounting methods. (DTN photo by Marcia Zarley Taylor)

QUESTION:

I farm in Minnesota and do my own tax work. My question involves the new IRS repair regulations which require us to justify if expenses over $500 are a repair (part of routine maintenance) or if it is a "betterment, restoration or an adaption" to that property.

The only items on my depreciation schedule are pieces of farm equipment and a farm shop built in 2013. There are no building or equipment repair items listed. There have been no "major" repairs such as overhauls to depreciate, so routine repair items have all been deducted on schedule F along with supplies needed. Do I need to file a form 3115 to change accounting methods even if there are no changes? I use the cash method of accounting and deduct maintenance items when I purchase them. Everything I read seems to say the form should be filed even if no adjustments are made, but it seems foolish if I am not changing anything.

ANSWER:

To be candid, your judgment on this repair regulation issue has been better than some CPA firms. You are absolutely correct: You do not need to file a Form 3115 to change an accounting method if there are no prior transactions or methods that requires correction. The IRS earlier this month released a Q&A document on its website on these repair regulations, providing some long overdue clarity http://www.irs.gov/….

In that document, they point out that the regulations are based on prior cases and rulings, and most taxpayers, especially small businesses, will not need to make accounting method changes. Further, a small business that does not want to scrutinize pre-2014 transactions for compliance with the new regulations and is willing to accept the risk of IRS exam changes to prior years can simply apply the new regulations prospectively to current transactions in 2014 and after (Rev. Proc. 2015-20).

There are two actions you should consider in your 2014 tax return, if not already filed: (1) Make the de minimis election under Reg. 1.263(a)-1(f) to ensure that all items under $500 can be expensed (this action should occur annually going forward); and (2) Indicate with a statement whether you are or are not following the small business safe harbor approach of applying the Regs. only to 2014 and after under Rev. Proc. 2015-20. (Warning: This decision may require professional help, but my view is that Rev. Proc. 2015-20 generally is not helpful. If the taxpayer later finds an opportunity for correcting a bad pre-2014 depreciation method, the choice presented in Rev. Proc. 2015-20 precludes a later fix which could provide favorable income deferral.)

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QUESTION:

I read your March column about how to minimize capital gains on a land sale and have a question: A friend has a primary residence and 30 acres farmland/pasture for sale. His wife died four years ago. Does he still get the $500,000 exemption or will it be $250,000? He thinks because her name is still on the deed that it will be $500,000. My question sounds simple, but the answer may not be as simple.

ANSWER:

Your view is correct: It requires a joint return to claim the $500,000 principal residence gain exclusion. Single filers receive a $250,000 gain exclusion. But here's the salvation: If the residence was co-owned, her half was revalued four years ago in her estate and received a new tax cost equal to 50% of the fair market value at that time. That "step-up in basis" four years ago should have eliminated most of the gain on her half, and hopefully the remaining $250,000 gain exclusion will offset whatever gain remains. If the residence was owned as community property, the entire tax basis was re-set at the date of death value.


QUESTION:

Your recent columns have pointed out how IRS rulings under the Affordable Care Act (ACA) now prohibit employers from reimbursing health insurance premiums instead of company provided health insurance. My wife and I are the only employees of a family farm corporation (Subchapter S). We are over 65 and each have a Medicare supplement policy for which the corporation pays the premiums as part of a health reimbursement plan. Since we are on Medicare and supplement policies are individual, are we in compliance with the ACA?

ANSWER:

The ACA applies penalties to employer reimbursement plans that cover two or more employees [Sec. 9831(a)(2)], so your present situation is technically in violation. But the IRS has waived the penalties for small businesses with fewer than 50 employees through June 30, 2015 [Notice 2015-17]. The waiver applies through Dec. 31, 2015, for the S corporation shareholder arrangement. As a result, you have a few months to make corrections to your arrangement. One solution might be to change the employment, such that only one of you is employed by the corporation. The S corporation then meets the one-employee exception to the ACA market reform rules, and can provide family health coverage for both of you.

Editor's Note: Andy Biebl is a CPA and principal with CliftonLarsonAllen LLP in Minneapolis and New Ulm, Minn., and a national authority on ag taxation. He writes a monthly column for our sister magazine, The Progressive Farmer. To pose questions for future columns, e-mail AskAndy@dtn.com.

(MZT/AG)

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