Busy Season Updates - TPR and ACA

Well into the start of busy season, the IRS issued important guidance on some parts of the Affordable Care Act (ACA) and how small businesses can adopt the tangible property regulations (TPR).  I've got a summary of the ACA updates (and beyond) in a short article in the 3/12/15 AICPA Tax Insider - An update on Affordable Care Act busy season developments.

Here is my summary of the TPR items as well as a recent news release by the California Franchise Tax Board on conformity with TPR.

Policy Item: Both the ACA items (particularly the relief from the $100/employee/day penalty for health reimbursement arrangements (HRAs) that violate ACA provisions), and the TPR relief for small businesses came after many diligent tax practitioners had already invested time with their clients and clients had invested money and may have changed business practices that may have been adverse to employees (to fix HRA problems).  It would be nice to see some practice implemented such that IRS can get this filing season related guidance out well before the start of filing season. Perhaps there should be a meeting in October with IRS and key tax practitioner groups (AICPA, NAEA, etc.) to identify the filing season challenges and suggest solutions that the IRS could issue guidance on before December).

What do you think?

Here is my TPR summary:  Hope it is helpful.

Adopting the Tangible Property Regulations
in Light of IRS Simplified Procedure of Rev. Proc. 2015-20
+ FTB Announcement on Conformity

On February 13, 2015, the IRS finally responded to requests of many practitioners to provide relief from filing Forms 3115 for all clients with depreciable assets, whether used for business or rental properties. Basically, this guidance – Rev. Proc. 2015-20, allows “a small business taxpayer, defined as a business with total assets of less than $10 million or average annual gross receipts of $10 million or less for the prior three taxable years” to adopt the tangible property regulations (TPR) on a cut-off basis. That means, no need for a Form 3115 or calculation of any §481(a) adjustment. With this approach, the small business just adopts the TPR for its tax year beginning on or after 1/1/14. The taxpayer continues to use its old method for repairs versus capitalization and supplies for prior tax years.

It is highly recommended that you read Rev. Proc. 2015-20. This will help in deciding whether to take this simplified method versus reviewing the clients tax records to determine where it has method changes and §481(a) adjustments. For example, you need to review the records to determine if in the past, something was expensed as a repair which the TPR would treat as an improvement. If that item would still be on the depreciation records if capitalized back in the year incurred, it generates a positive §481(a) adjustment. There may also be pre-2014 transactions where something was capitalized as an improvement when under the TPR, it is not an improvement so should have been expensed. If this asset is still being depreciated, a negative §481(a) adjustment is generated equal to the adjustment basis of the asset at 12/31/13 (assuming the taxpayer is using a calendar year as its tax year). 

The nature of the possible adjustments to adopt the TPR for prior years are summarized in Rev. Proc. 2015-14, Section 10.11 on Tangible Property. This was formerly in Rev. Proc. 2014-16.

Also relevant are the regulations on dispositions of property that related to the TPR. These regulations and Rev. Proc. 2014-54 (now part of Rev. Proc. 2015-14) allowed a one-time retroactive adjustment via a negative Section 481(a) adjustment for 2014 (assuming a calendar year) (see Section 6 of Rev. Proc. 2015-14).

Some observations to consider when you read Rev. Proc. 2015-20 and decide whether to go the Form 3115/§481(a) route or the simplified approach for your small clients.

	Rev. Proc. 2015-20 Simplified Approach (No 3115 or 481(a) adj.)	Rev. Proc. 2015-14 Method Changes and Forms 3115
Audit protection for prior years	No	Yes
Possibility of reducing 2014 taxable income for any negative §481(a) adjustment (after using the netting process of Rev. Proc. 2015-14).	No	Yes (note that if the 481(a) adjustment relates to a passive activity, it is a passive activity deduction only usable against passive activity income).
Ability to make the optional late partial disposition election that is only available for 2014 (producing a negative §81(a) adjustment).	No	Yes
Time commitment	To consider whether to go the simplified route (no 3115 or §481(a) adjustment) or do the full method adoption.	Time is needed to review depreciation schedule and inquire about past repairs. Need to review supplies treatment in light of TPR. Creation of documents to support required §481(a) adjustments. Spend time with Rev. Proc. 2015-14 on how to make the method changes.
Taxpayer’s tax records	·   2014 and later follow TPR ·   Tax years prior to 2014 follow the taxpayer’s method used prior to the TPR.	All of taxpayer’s tax records follow the TPR (due to the §481(a) adjustments made).

Additional Information

·         Rev. Proc. 2015-20 includes a special rule in identifying taxpayers eligible for the $10 million measure of being “small.” Basically, if the taxpayer has separate and distinct trades or businesses, it does not aggregate their gross receipts to see if the $10 million threshold is crossed.  See Section 4 of Rev. Proc. 2015-20.

·         In Rev. Proc. 2015-20, the IRS requests comments on whether the $500 de minimis safe harbor election amount of Reg. 1.263(a)-1(f) should be increased.

·         In February 2015, the IRS announced a new address for Form 3115 required to be mailed to Ogden.

·         In March 2015, the IRS released FAQs on the TPR. The FAQ on Rev. Proc. 2015-20 suggests that taxpayers using the simplified procedure include a statement on the 2014 return that the taxpayer is a qualifying trade or business using the simplified procedure of Rev. Proc. 2015-20.

California and TPR and Method Changes

In its March 2015 newsletter, the Franchise Tax Board (FTB) explains how the federal TPR apply in California and the effect of a federal Form 3115. Quoting one key part of this news:

“Does California Follow the Repair Regulations?

Yes, for taxable years starting on or after January 1, 2010, California conforms to the Internal Revenue Code as enacted on January 1, 2009. Any regulations for the Internal Revenue Code as in effect on January 1, 2009, are applicable as regulations of the FTB unless they conflict with a provision of the Revenue and Taxation Code or a regulation of the FTB. The FTB is currently not aware of any specific repair regulations which the FTB would not follow”

The FTB also states that any method change made for federal income tax purposes also changes the method for California purposes. FTB notes though, that if the §481(a) adjustment involves depreciation, the §481(a) amount for California corporations will be different..

Finally, the FTB states that it will follow Rev. Proc. 2015-20.

 

ACA - Affordability of health insurance and age

In filing our 2014 tax returns, we will all have to answer a new question (line 61 on the 2014 Form 1040) - did you and everyone in your family (spouses and dependents on the return) have health coverage for every month of 2014.  If anyone was lacking coverage for any month, they must next determine if they meet an exemption. If they do not, they owe the Individual Shared Responsibility Payment (penalty). One of the exemptions that many people might qualify for is that the health insurance available to them was unaffordable. If the employer offered coverage, you look at the cost of that coverage (cost less what employer contributes to that cost). If the employer did not offer coverage, you look at what the cost of coverage would have been in the Marketplace (Exchange). If you would have been eligible for a Premium Tax Credit (Section 36B), you must reduce that cost of Marketplace coverage by the credit you could have obtained.

That is a very quick summary of some fairly complex rules.  I want to point out that the measure of affordability to avoid the penalty is the same for everyone regardless of age, even though insurance costs more as we age.

For example, I pulled this information from the Covered California website (the state exchange for California).  I used a San Jose zip code and bronze level coverage (Bronze 60 PPO) for a single individual who does not have coverage through her employer.  Here is the annual cost of this coverage at these age levels:

25   $2,932
35   $3,452
45   $3,898
55   $5,692
64   $7,679

At an income level of $50,000, the individual is not eligible for a Premium Tax Credit because her income exceeds 400% of the federal poverty line, or $45,960.  For the unaffordable exemption, multiply household income (here, $50,000) by 8%.  If the cost is greater, the coverage is not affordable and this uninsured individual will avoid having to pay the Individual Shared Responsibility Payment.  Well, 8% of $50,000 is $4,000.  So, at age 55 and 64, this individual avoids the penalty and they attach Form 8965 to their return showing they meet the unaffordable exemption (the Form 8965 instructions explain the exemptions, as does Section 5000A and the regulations).

At ages 25, 35, and 45, this individual could have afforded coverage on the Marketplace (based on the 8% factor relevant in determining if the penalty applies). So, unless they meet some other exemption, they will owe the penalty (reported on line 61 of Form 1040; this is the Individual Shared Responsibility Payment).

Given that health insurance costs more as we age, why is 8% of household income the affordability measure for all individuals regardless of age? 

This example also illustrates that the Affordable Care Act does not help everyone get insurance. In this simple example, the individual at age 55 or 64 (or in between) and $50,000 of income, is not eligible for a Premium Tax Credit to subsidize the cost of coverage (because that income amount exceeds 400% of the federal poverty line). If no employer coverage is available and they truly cannot afford the cost of coverage through the Exchange (which likely is as low as they would get outside of the Exchange), they go uninsured.  The rules assume that when insurance costs more than 8% of income, it is unaffordable, yet that same unaffordable income level is too high to qualify for a subsidy (the credit). Something seems out of whack here.  Why doesn't the affordability factor consider age and eligibility for the credit (subsidy)? Or, why don't the credit (subsidy) rules factor in increasing cost of coverage as we age? While these rules may enable an older person to avoid the penalty, they don't result in health insurance coverage.

And one more point - how one spends their monthly income will vary from city to city due to cost of living differences. Here is a report from Zumper for August 2014 showing monthly rent for a one bedroom apartment as $3,100 in San Francisco, but only $590 in Indianapolis. Should availability of a premium tax credit factor in where you live rather than assuming anyone with household income over 400% of the federal poverty line (which is only higher for Hawaii and Alaska; but the same for the 48 contiguous states), can afford the lowest cost bronze level insurance without a subsidy?

What do you think?

For a brief overview to the credit and penalty, see IRS Publication 5187.