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Ask the Taxman by Andy Biebl
Friday, May 22, 2015 1:52PM CDT

By Andy Biebl
DTN Tax Columnist

QUESTION:

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:

Unfortunately, the Affordable Care Act has effectively eliminated most of these small employer reimbursements of employee health insurance premiums or other out-of-pocket medical costs. Back in mid-2013 the IRS issued a notice explaining that these reimbursement arrangements violate the "market reforms" of the ACA (Notice 2013-54). The consequence of violating these new rules, generally effective in 2014, is severe: The employer is subject to a $100 per day per employee excise tax. However, the IRS has granted temporary relief through June 30, 2015. In Notice 2015-17, the IRS provided a grace period to small employers, defined as an employer that employed, on average, fewer than 50 full-time employees, including full-time equivalent employees, during the prior year. These small employers are permitted to maintain these premium reimbursement arrangements through June 30, 2015. But any reimbursement of individual employee health insurance premiums after that point exposes the employer to the severe $100 per day penalty.


QUESTION:

My husband is in his 70s and has a son from a prior marriage. I do not have any children. Our estate plan includes a trust for my husband's son and a trust with our joint assets to care for the surviving spouse. My husband has 300 acres to contribute to our joint trust plus some horses. What is the best way to insure that my stepson doesn't challenge our joint trust should his father die before me?

ANSWER:

I assume from your description that your husband's share of the joint or marital assets is to be placed in a trust, providing income to you during your lifetime, but then the assets pass to your stepson. Apparently, your concern is that the stepson will challenge that arrangement, seeking immediate access to those assets rather than waiting for your eventual estate. You get two responses to this concern: First the legal and then the practical.

The legality of a will or trust and challenges to those documents are grounded in state law. If you have a concern, I would suggest engaging an attorney within your state to provide a second opinion on the strength and clarity of the language in your present arrangement. It may be possible to add an amendment or clarifying language that better protects the intent of you and your husband.

But let me add some practical advice from years of experience. The post-death challenges I see in these situations often arise because the next generation is surprised by what a parent has done in a will, and suspects it was not actually the parent's intent but rather a plan that arose from the influence of the second spouse. The best defense is often clear communication from your husband now about the estate plan, to assure his son understands this plan is precisely what your husband desires. This bit of advice is probably a higher priority than simply shoring up the legalities. Good communication can prevent any issue from arising. Better legalities will help you prevail in a lawsuit, but that is a more costly and emotionally tumultuous outcome.

EDITOR'S NOTE: Andy Biebl is a nationally recognized CPA and tax principal who specializes in agriculture with CliftonLarsonAllen LLP in Minneapolis and New Ulm, Minnesota. He writes tax columns for DTN and its sister publication, The Progressive Farmer magazine. To submit questions for future columns, email AskAndy@dtn.com. Subscribers can always find Biebl's columns in Town Hall, on the Farm Business page or online using the Search feature under News.

(MZT/CZ)


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