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Irs Problems

Irs problems 6. Irs problems   Basis of Assets Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Cost BasisReal Property Allocating the Basis Uniform Capitalization Rules Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostTaxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Received as a Gift Property Transferred From a Spouse Inherited Property Property Distributed From a Partnership or Corporation Introduction Your basis is the amount of your investment in property for tax purposes. Irs problems Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. Irs problems Also use basis to figure depreciation, amortization, depletion, and casualty losses. Irs problems If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Irs problems Only the basis allocated to the business or investment use of the property can be depreciated. Irs problems Your original basis in property is adjusted (increased or decreased) by certain events. Irs problems For example, if you make improvements to the property, increase your basis. Irs problems If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis. Irs problems Keep accurate records of all items that affect the basis of your assets. Irs problems For information on keeping records, see chapter 1. Irs problems Topics - This chapter discusses: Cost basis Adjusted basis Basis other than cost Useful Items - You may want to see: Publication 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property See chapter 16 for information about getting publications and forms. Irs problems Cost Basis The basis of property you buy is usually its cost. Irs problems Cost is the amount you pay in cash, debt obligations, other property, or services. Irs problems Your cost includes amounts you pay for sales tax, freight, installation, and testing. Irs problems The basis of real estate and business assets will include other items, discussed later. Irs problems Basis generally does not include interest payments. Irs problems However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535. Irs problems You also may have to capitalize (add to basis) certain other costs related to buying or producing property. Irs problems Under the uniform capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property. Irs problems Loans with low or no interest. Irs problems   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus the amount considered to be unstated interest. Irs problems You generally have unstated interest if your interest rate is less than the applicable federal rate. Irs problems See the discussion of unstated interest in Publication 537, Installment Sales. Irs problems Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Irs problems If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Irs problems Some of these expenses are discussed next. Irs problems Lump sum purchase. Irs problems   If you buy improvements, such as buildings, and the land on which they stand for a lump sum, allocate your cost basis between the land and improvements. Irs problems Allocate the cost basis according to the respective fair market values (FMVs) of the land and improvements at the time of purchase. Irs problems Figure the basis of each asset by multiplying the lump sum by a fraction. Irs problems The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Irs problems Fair market value (FMV). Irs problems   FMV is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Irs problems Sales of similar property on or about the same date may help in figuring the FMV of the property. Irs problems If you are not certain of the FMV of the land and improvements, you can allocate the basis according to their assessed values for real estate tax purposes. Irs problems Real estate taxes. Irs problems   If you pay the real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. Irs problems   If you reimburse the seller for taxes the seller paid for you, you generally can deduct that amount as a tax expense. Irs problems Whether or not you reimburse the seller, do not include that amount in the basis of your property. Irs problems Settlement costs. Irs problems   Your basis includes the settlement fees and closing costs for buying the property. Irs problems See Publication 551 for a detailed list of items you can and cannot include in basis. Irs problems   Do not include fees and costs for getting a loan on the property. Irs problems Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Irs problems Points. Irs problems   If you pay points to get a loan (including a mortgage, second mortgage, or line-of-credit), do not add the points to the basis of the related property. Irs problems You may be able to deduct the points currently or over the term of the loan. Irs problems For more information about deducting points, see Points in chapter 4 of Publication 535. Irs problems Assumption of a mortgage. Irs problems   If you buy property and assume (or buy the property subject to) an existing mortgage, your basis includes the amount you pay for the property plus the amount you owe on the mortgage. Irs problems Example. Irs problems If you buy a farm for $100,000 cash and assume a mortgage of $400,000, your basis is $500,000. Irs problems Constructing assets. Irs problems   If you build property or have assets built for you, your expenses for this construction are part of your basis. Irs problems Some of these expenses include the following costs: Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. Irs problems   In addition, if you use your own employees, farm materials, and equipment to build an asset, do not deduct the following expenses. Irs problems You must capitalize them (include them in the asset's basis). Irs problems Employee wages paid for the construction work, reduced by any employment credits allowed. Irs problems Depreciation on equipment you own while it is used in the construction. Irs problems Operating and maintenance costs for equipment used in the construction. Irs problems The cost of business supplies and materials used in the construction. Irs problems    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. Irs problems Allocating the Basis In some instances, the rules for determining basis apply to a group of assets acquired in the same transaction or to property that consists of separate items. Irs problems To determine the basis of these assets or separate items, there must be an allocation of basis. Irs problems Group of assets acquired. Irs problems   If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. Irs problems Use this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. Irs problems You and the seller may agree in the sales contract to a specific allocation of the purchase price among the assets. Irs problems If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. Irs problems Farming business acquired. Irs problems   If you buy a group of assets that makes up a farming business, there are special rules you must use to allocate the purchase price among the assets. Irs problems Generally, reduce the purchase price by any cash received. Irs problems Allocate the remaining purchase price to the other business assets received in proportion to (but not more than) their FMV and in a certain order. Irs problems See Trade or Business Acquired under Allocating the Basis in Publication 551 for more information. Irs problems Transplanted embryo. Irs problems   If you buy a cow that is pregnant with a transplanted embryo, allocate to the basis of the cow the part of the purchase price equal to the FMV of the cow without the implant. Irs problems Allocate the rest of the purchase price to the basis of the calf. Irs problems Neither the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense. Irs problems Uniform Capitalization Rules Under the uniform capitalization rules, you must include certain direct and indirect costs in the basis of property you produce or in your inventory costs, rather than claim them as a current deduction. Irs problems You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Irs problems Generally, you are subject to the uniform capitalization rules if you do any of the following: Produce real or tangible personal property, or Acquire property for resale. Irs problems However, this rule does not apply to personal property if your average annual gross receipts for the 3-tax-year period ending with the year preceding the current tax year are $10 million or less. Irs problems You produce property if you construct, build, install, manufacture, develop, improve, or create the property. Irs problems You are not subject to the uniform capitalization rules if the property is produced for personal use. Irs problems In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants and animals. Irs problems Plants. Irs problems   A plant produced in a farming business includes the following items: A fruit, nut, or other crop-bearing tree; An ornamental tree; A vine; A bush; Sod; and The crop or yield of a plant that will have more than one crop or yield. Irs problems Animals. Irs problems   An animal produced in a farming business includes any stock, poultry or other bird, and fish or other sea life. Irs problems The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. Irs problems Preparatory costs include the acquisition costs of the seed, seedling, plant, or animal. Irs problems For plants, preproductive period costs include the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. Irs problems For animals, preproductive period costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding. Irs problems Exceptions. Irs problems   In a farming business, the uniform capitalization rules do not apply to: Any animal, Any plant with a preproductive period of 2 years or less, or Any costs of replanting certain plants lost or damaged due to casualty. Irs problems   Exceptions (1) and (2) do not apply to a corporation, partnership, or tax shelter required to use an accrual method of accounting. Irs problems See Accrual Method Required under Accounting Methods in chapter 2. Irs problems   In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more than 2 years. Irs problems If you make this election, special rules apply. Irs problems This election cannot be made by a corporation, partnership, or tax shelter required to use an accrual method of accounting. Irs problems This election also does not apply to any costs incurred for the planting, cultivation, maintenance, or development of any citrus or almond grove (or any part thereof) within the first 4 years the trees were planted. Irs problems    If you elect not to use the uniform capitalization rules, you must use the alternative depreciation system for all property used in any of your farming businesses and placed in service in any tax year during which the election is in effect. Irs problems See chapter 7, for additional information on depreciation. Irs problems Example. Irs problems You grow trees that have a preproductive period of more than 2 years. Irs problems The trees produce an annual crop. Irs problems You are an individual and the uniform capitalization rules apply to your farming business. Irs problems You must capitalize the direct costs and an allocable part of indirect costs incurred due to the production of the trees. Irs problems You are not required to capitalize the costs of producing the annual crop because its preproductive period is 2 years or less. Irs problems Preproductive period of more than 2 years. Irs problems   The preproductive period of plants grown in commercial quantities in the United States is based on their nationwide weighted average preproductive period. Irs problems Plants producing the crops or yields shown in Table 6-1 have a nationwide weighted average preproductive period of more than 2 years. Irs problems Other plants (not shown in Table 6-1) may also have a nationwide weighted average preproductive period of more than 2 years. Irs problems More information. Irs problems   For more information on the uniform capitalization rules that apply to property produced in a farming business, see Regulations section 1. Irs problems 263A-4. Irs problems Table 6-1. Irs problems Plants With a Preproductive Period of More Than 2 Years Plants producing the following crops or yields have a nationwide weighted average preproductive period of more than 2 years. Irs problems Almonds Apples Apricots Avocados Blueberries Cherries Chestnuts Coffee beans Currants Dates Figs Grapefruit Grapes Guavas Kiwifruit Kumquats Lemons Limes Macadamia nuts Mangoes Nectarines Olives Oranges Peaches Pears Pecans Persimmons Pistachio nuts Plums Pomegranates Prunes Tangelos Tangerines Tangors Walnuts Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the cost basis or basis other than cost (discussed later) of the property. Irs problems The adjustments to the original basis are increases or decreases to the cost basis or other basis which result in the adjusted basis of the property. Irs problems Increases to Basis Increase the basis of any property by all items properly added to a capital account. Irs problems These include the cost of any improvements having a useful life of more than 1 year. Irs problems The following costs increase the basis of property. Irs problems The cost of extending utility service lines to property. Irs problems Legal fees, such as the cost of defending and perfecting title. Irs problems Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements. Irs problems Assessments for items such as paving roads and building ditches that increase the value of the property assessed. Irs problems Do not deduct these expenses as taxes. Irs problems However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements. Irs problems If you make additions or improvements to business property, depreciate the basis of each addition or improvement as separate depreciable property using the rules that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. Irs problems See chapter 7. Irs problems Deducting vs. Irs problems capitalizing costs. Irs problems   Do not add to your basis costs you can deduct as current expenses. Irs problems For example, amounts paid for incidental repairs or maintenance are deductible as business expenses and are not added to basis. Irs problems However, you can elect either to deduct or to capitalize certain other costs. Irs problems See chapter 7 in Publication 535. Irs problems Decreases to Basis The following are some items that reduce the basis of property. Irs problems Section 179 deduction. Irs problems Deductions previously allowed or allowable for amortization, depreciation, and depletion. Irs problems Alternative motor vehicle credit. Irs problems See Form 8910. Irs problems Alternative fuel vehicle refueling property credit. Irs problems See Form 8911. Irs problems Residential energy efficient property credits. Irs problems See Form 5695. Irs problems Investment credit (part or all) taken. Irs problems Casualty and theft losses and insurance reimbursements. Irs problems Payments you receive for granting an easement. Irs problems Exclusion from income of subsidies for energy conservation measures. Irs problems Certain canceled debt excluded from income. Irs problems Rebates from a manufacturer or seller. Irs problems Patronage dividends received from a cooperative association as a result of a purchase of property. Irs problems See Patronage Dividends in chapter 3. Irs problems Gas-guzzler tax. Irs problems See Form 6197. Irs problems Some of these items are discussed next. Irs problems For a more detailed list of items that decrease basis, see section 1016 of the Internal Revenue Code and Publication 551. Irs problems Depreciation and section 179 deduction. Irs problems   The adjustments you must make to the basis of the property if you take the section 179 deduction or depreciate the property are explained next. Irs problems For more information on these deductions, see chapter 7. Irs problems Section 179 deduction. Irs problems   If you take the section 179 expense deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. Irs problems Depreciation. Irs problems   Decrease the basis of property by the depreciation you deducted or could have deducted on your tax returns under the method of depreciation you chose. Irs problems If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. Irs problems If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. Irs problems   If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for any year. Irs problems   See chapter 7 for information on figuring the depreciation you should have claimed. Irs problems   In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation you must capitalize under the uniform capitalization rules. Irs problems Casualty and theft losses. Irs problems   If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement. Irs problems Also, decrease it by any deductible loss not covered by insurance. Irs problems See chapter 11 for information about figuring your casualty or theft loss. Irs problems   You must increase your basis in the property by the amount you spend on clean-up costs (such as debris removal) and repairs that restore the property to its pre-casualty condition. Irs problems To make this determination, compare the repaired property to the property before the casualty. Irs problems Easements. Irs problems   The amount you receive for granting an easement is usually considered to be proceeds from the sale of an interest in the real property. Irs problems It reduces the basis of the affected part of the property. Irs problems If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. Irs problems See Easements and rights-of-way in chapter 3. Irs problems Exclusion from income of subsidies for energy conservation measures. Irs problems   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. Irs problems Reduce the basis of the property by the excluded amount. Irs problems Canceled debt excluded from income. Irs problems   If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. Irs problems A debt includes any indebtedness for which you are liable or which attaches to property you hold. Irs problems   You can exclude your canceled debt from income if the debt is any of the following. Irs problems Debt canceled in a bankruptcy case or when you are insolvent. Irs problems Qualified farm debt. Irs problems Qualified real property business debt (provided you are not a C corporation). Irs problems Qualified principal residence indebtedness. Irs problems Discharge of certain indebtedness of a qualified individual because of Midwestern disasters. Irs problems If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. Irs problems If you exclude canceled debt described in (3), you must only reduce the basis of your depreciable property by the excluded amount. Irs problems   For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. Irs problems For more information about insolvency and canceled debt that is qualified farm debt or qualified principal residence indebtedness, see chapter 3. Irs problems For more information about qualified real property business debt, see Publication 334, Tax Guide for Small Business. Irs problems For more information about canceled debt in Midwestern disaster areas, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Irs problems Basis Other Than Cost There are times when you cannot use cost as basis. Irs problems In these situations, the fair market value or the adjusted basis of property may be used. Irs problems Examples are discussed next. Irs problems Property changed from personal to business or rental use. Irs problems   When you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. Irs problems An example of changing property from personal to business use would be changing the use of your pickup truck that you originally purchased for your personal use to use in your farming business. Irs problems   The basis for depreciation is the lesser of: The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. Irs problems   If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. Irs problems The basis for figuring a gain is your adjusted basis in the property when you sell the property. Irs problems Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Irs problems Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Irs problems Property received for services. Irs problems   If you receive property for services, include the property's FMV in income. Irs problems The amount you include in income becomes your basis. Irs problems If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. Irs problems Example. Irs problems George Smith is an accountant and also operates a farming business. Irs problems George agreed to do some accounting work for his neighbor in exchange for a dairy cow. Irs problems The accounting work and the cow are each worth $1,500. Irs problems George must include $1,500 in income for his accounting services. Irs problems George's basis in the cow is $1,500. Irs problems Taxable Exchanges A taxable exchange is one in which the gain is taxable, or the loss is deductible. Irs problems A taxable gain or deductible loss also is known as a recognized gain or loss. Irs problems A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. Irs problems If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. Irs problems Example. Irs problems You trade a tract of farmland with an adjusted basis of $2,000 for a tractor that has an FMV of $6,000. Irs problems You must report a taxable gain of $4,000 for the land. Irs problems The tractor has a basis of $6,000. Irs problems Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property you receive using the basis of the converted property. Irs problems Similar or related property. Irs problems   If the replacement property is similar or related in service or use to the converted property, the replacement property's basis is the same as the old property's basis on the date of the conversion. Irs problems However, make the following adjustments. Irs problems Decrease the basis by the following amounts. Irs problems Any loss you recognize on the involuntary conversion. Irs problems Any money you receive that you do not spend on similar property. Irs problems Increase the basis by the following amounts. Irs problems Any gain you recognize on the involuntary conversion. Irs problems Any cost of acquiring the replacement property. Irs problems Money or property not similar or related. Irs problems   If you receive money or property not similar or related in service or use to the converted property and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the involuntary conversion. Irs problems Allocating the basis. Irs problems   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Irs problems Basis for depreciation. Irs problems   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Irs problems For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Irs problems For more information about involuntary conversions, see chapter 11. Irs problems Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Irs problems A nontaxable gain or loss also is known as an unrecognized gain or loss. Irs problems If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. Irs problems Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Irs problems For an exchange to qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. Irs problems There must also be an exchange of like-kind property. Irs problems For more information, see Like-Kind Exchanges in  chapter 8. Irs problems The basis of the property you receive generally is the same as the adjusted basis of the property you gave up. Irs problems Example 1. Irs problems You traded a truck you used in your farming business for a new smaller truck to use in farming. Irs problems The adjusted basis of the old truck was $10,000. Irs problems The FMV of the new truck is $30,000. Irs problems Because this is a nontaxable exchange, you do not recognize any gain, and your basis in the new truck is $10,000, the same as the adjusted basis of the truck you traded. Irs problems Example 2. Irs problems You trade a field cultivator (adjusted basis of $8,000) for a planter (FMV of $9,000). Irs problems You use both the field cultivator and the planter in your farming business. Irs problems The basis of the planter you receive is $8,000, the same as the field cultivator traded Exchange expenses. Irs problems   Exchange expenses generally are the closing costs that you pay. Irs problems They include such items as brokerage commissions, attorney fees, and deed preparation fees. Irs problems Add them to the basis of the like-kind property you receive. Irs problems Property plus cash. Irs problems   If you trade property in a like-kind exchange and also pay money, the basis of the property you receive is the adjusted basis of the property you gave up plus the money you paid. Irs problems Example. Irs problems You trade in a truck (adjusted basis of $3,000) for another truck (FMV of $7,500) and pay $4,000. Irs problems Your basis in the new truck is $7,000 (the $3,000 adjusted basis of the old truck plus the $4,000 cash). Irs problems Special rules for related persons. Irs problems   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. Irs problems Each person must report any gain or loss not recognized on the original exchange unless the loss is not deductible under the related party rules. Irs problems Each person reports it on the tax return filed for the year in which the later disposition occurred. Irs problems If this rule applies, the basis of the property received in the original exchange will be its FMV. Irs problems For more information, see chapter 8. Irs problems Exchange of business property. Irs problems   Exchanging the property of one business for the property of another business generally is a multiple property exchange. Irs problems For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. Irs problems Basis for depreciation. Irs problems   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. Irs problems For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Irs problems Partially Nontaxable Exchanges A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Irs problems The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments. Irs problems Decrease the basis by the following amounts. Irs problems Any money you receive. Irs problems Any loss you recognize on the exchange. Irs problems Increase the basis by the following amounts. Irs problems Any additional costs you incur. Irs problems Any gain you recognize on the exchange. Irs problems If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Irs problems Example 1. Irs problems You trade farmland (basis of $100,000) for another tract of farmland (FMV of $110,000) and $30,000 cash. Irs problems You realize a gain of $40,000. Irs problems This is the FMV of the land received plus the cash minus the basis of the land you traded ($110,000 + $30,000 − $100,000). Irs problems Include your gain in income (recognize gain) only to the extent of the cash received. Irs problems Your basis in the land you received is figured as follows. Irs problems Basis of land traded $100,000 Minus: Cash received (adjustment 1(a)) − 30,000   $70,000 Plus: Gain recognized (adjustment 2(b)) + 30,000 Basis of land received $100,000 Example 2. Irs problems You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. Irs problems You realize a gain of $7,250. Irs problems This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($20,000 + $10,000 − $22,750). Irs problems You include all the gain in your income (recognize gain) because the gain is less than the cash you received. Irs problems Your basis in the truck you received is figured as follows. Irs problems Adjusted basis of truck traded $22,750 Minus: Cash received (adjustment 1(a)) −10,000   $12,750 Plus: Gain recognized (adjustment 2(b)) + 7,250 Basis of truck received $20,000 Allocation of basis. Irs problems   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Irs problems The rest is the basis of the like-kind property. Irs problems Example. Irs problems You traded a tractor with an adjusted basis of $15,000 for another tractor that had an FMV of $12,500. Irs problems You also received $1,000 cash and a truck that had an FMV of $3,000. Irs problems The truck is unlike property. Irs problems You realized a gain of $1,500. Irs problems This is the FMV of the tractor received plus the FMV of the truck received plus the cash minus the adjusted basis of the tractor you traded ($12,500 + $3,000 + $1,000 − $15,000). Irs problems You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. Irs problems Your basis in the properties you received is figured as follows. Irs problems Adjusted basis of old tractor $15,000 Minus: Cash received (adjustment 1(a)) − 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) + 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property—the truck ($3,000). Irs problems This is the truck's FMV. Irs problems The rest ($12,500) is the basis of the tractor. Irs problems Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. Irs problems Example. Irs problems You used a tractor on your farm for 3 years. Irs problems Its adjusted basis is $22,000 and its FMV is $40,000. Irs problems You are interested in a new tractor, which sells for $60,000. Irs problems Ordinarily, you would trade your old tractor for the new one and pay the dealer $20,000. Irs problems Your basis for depreciating the new tractor would then be $42,000 ($20,000 + $22,000, the adjusted basis of your old tractor). Irs problems However, you want a higher basis for depreciating the new tractor, so you agree to pay the dealer $60,000 for the new tractor if he will pay you $40,000 for your old tractor. Irs problems Because the two transactions are dependent on each other, you are treated as having exchanged your old tractor for the new one and paid $20,000 ($60,000 − $40,000). Irs problems Your basis for depreciating the new tractor is $42,000, the same as if you traded the old tractor. Irs problems Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you. Irs problems You also must know its FMV at the time it was given to you and any gift tax paid on it. Irs problems FMV equal to or greater than donor's adjusted basis. Irs problems   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis when you received the gift. Irs problems Increase your basis by all or part of any gift tax paid, depending on the date of the gift. Irs problems   Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. Irs problems See Adjusted Basis , earlier. Irs problems   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Irs problems Figure the increase by multiplying the gift tax paid by the following fraction. Irs problems Net increase in value of the gift Amount of the gift   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Irs problems The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Irs problems Example. Irs problems In 2013, you received a gift of property from your mother that had an FMV of $50,000. Irs problems Her adjusted basis was $20,000. Irs problems The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Irs problems She paid a gift tax of $7,320. Irs problems Your basis, $26,076, is figured as follows. Irs problems Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000 Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . Irs problems 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. Irs problems If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Irs problems However, your basis cannot exceed the FMV of the gift when it was given to you. Irs problems FMV less than donor's adjusted basis. Irs problems   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Irs problems Your basis for figuring gain is the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Irs problems Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. Irs problems (See Adjusted Basis , earlier. Irs problems )   If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither gain nor loss on the sale or other disposition of the property. Irs problems Example. Irs problems You received farmland as a gift from your parents when they retired from farming. Irs problems At the time of the gift, the land had an FMV of $80,000. Irs problems Your parents' adjusted basis was $100,000. Irs problems After you received the land, no events occurred that would increase or decrease your basis. Irs problems If you sell the land for $120,000, you will have a $20,000 gain because you must use the donor's adjusted basis at the time of the gift ($100,000) as your basis to figure a gain. Irs problems If you sell the land for $70,000, you will have a $10,000 loss because you must use the FMV at the time of the gift ($80,000) as your basis to figure a loss. Irs problems If the sales price is between $80,000 and $100,000, you have neither gain nor loss. Irs problems For instance, if the sales price was $90,000 and you tried to figure a gain using the donor's adjusted basis ($100,000), you would get a $10,000 loss. Irs problems If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain. Irs problems Business property. Irs problems   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Irs problems Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. Irs problems The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. Irs problems However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed plus the liabilities to which the property is subject are more than the adjusted basis of the property transferred. Irs problems The transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. Irs problems For more information, see Property Settlements in Publication 504, Divorced or Separated Individuals. Irs problems Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. Irs problems If a federal estate return is filed, you can use its appraised value. Irs problems The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation. Irs problems For information on the alternate valuation, see the Instructions for Form 706. Irs problems The decedent's adjusted basis in land to the extent of the value that is excluded from the decedent's taxable estate as a qualified conservation easement. Irs problems If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Irs problems Special-use valuation method. Irs problems   Under certain conditions, when a person dies, the executor or personal representative of that person's estate may elect to value qualified real property at other than its FMV. Irs problems If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. Irs problems If the executor or personal representative elects this method of valuation for estate tax purposes, this value is the basis of the property for the qualified heirs. Irs problems The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. Irs problems   If you are a qualified heir who received special-use valuation property, increase your basis by any gain recognized by the estate or trust because of post-death appreciation. Irs problems Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or on the alternate valuation date. Irs problems Figure all FMVs without regard to the special-use valuation. Irs problems   You may be liable for an additional estate tax if, within 10 years after the death of the decedent, you transfer the property or the property stops being used as a farm. Irs problems This tax does not apply if you dispose of the property in a like-kind exchange or in an involuntary conversion in which all of the proceeds are reinvested in qualified replacement property. Irs problems The tax also does not apply if you transfer the property to a member of your family and certain requirements are met. Irs problems   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. Irs problems To increase your basis, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of payment of the additional estate tax. Irs problems If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. Irs problems The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax. Irs problems   You make the election by filing, with Form 706-A, United States Additional Estate Tax Return, a statement that: Contains your (and the estate's) name, address, and taxpayer identification number; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which you are making the election; and Provides any additional information required by the Form 706-A instructions. Irs problems   For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706-A, and the related instructions. Irs problems Property inherited from a decedent who died in 2010. Irs problems   If you inherited property from a decedent who died in 2010, different rules may apply. Irs problems See Publication 4895, Tax Treatment of Property Acquired From a Decendent Dying in 2010, for details. Irs problems Property Distributed From a Partnership or Corporation The following rules apply to determine a partner's basis and a shareholder's basis in property distributed respectively from a partnership to the partner with respect to the partner's interest in the partnership and from a corporation to the shareholder with respect to the shareholder's ownership of stock in the corporation. Irs problems Partner's basis. Irs problems   Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed by a partnership to the partner is its adjusted basis to the partnership immediately before the distribution. Irs problems However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. Irs problems For more information, see Partner's Basis for Distributed Property in Publication 541, Partnerships. Irs problems Shareholder's basis. Irs problems   The basis of property distributed by a corporation to a shareholder is its fair market value. Irs problems For more information about corporate distributions, see Distributions to Shareholders in Publication 542, Corporations. Irs problems Prev  Up  Next   Home   More Online Publications
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Affordable Care Act Tax Provisions

Check out the new Affordable Care Act Tax Provisions Home Page

Información en Español: Disposiciones de La Ley del Cuidado de Salud de Bajo Precio
 

Update

The open enrollment period to purchase health insurance coverage for 2014 through the Health Insurance Marketplace runs from Oct. 1, 2013, through March 31, 2014. If you are seeking information about how to obtain health care coverage or financial assistance to purchase health care coverage for you and your family, visit the Health and Human Services website, HealthCare.gov.

Effect of Sequestration on Small Business Health Care Tax Credit

Pursuant to the requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, refund payments issued to certain small tax-exempt employers claiming the refundable portion of the Small Business Health Care Tax Credit under Internal Revenue Code Section 45R, are subject to sequestration. This means that refund payments processed on or after Oct.1, 2013, and on or before Sept. 30, 2014, to a Section 45R applicant will be reduced by the fiscal year 2014 sequestration rate of 7.2 percent, irrespective of when the original or amended tax return was received by the IRS. The sequestration reduction rate will be applied unless and until a law is enacted that cancels or otherwise impacts the sequester, at which time the sequestration reduction rate is subject to change.

Affected taxpayers will be notified through correspondence that a portion of their requested payment was subject to the sequester reduction and the amount.

IRC §7216, Disclosure or Use of Information by Tax Return Preparers

Final Treasury Regulations on rules and consent requirements relating to the disclosure or use of tax return information by tax return preparers became effective Dec. 28, 2012. For additional information about how these apply to services and education related to the Affordable Care Act, please see our questions and answers

Medical Loss Ratio (MLR)

Beginning in 2011, insurance companies are required to spend a specified percentage of premium dollars on medical care and quality improvement activities, meeting a medical loss ratio (MLR) standard. Insurance companies that are not meeting the MLR standard will be required to provide rebates to their consumers beginning in 2012. For information on the federal tax consequences to an insurance company that pays a MLR rebate and an individual policyholder who receives a MLR rebate, as well as information on the federal tax consequences to employees if a MLR rebate stems from a group health insurance policy, see our frequently asked questions.

Reporting Employer Provided Health Coverage in Form W-2

The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan on an employee’s Form W-2, Wage and Tax Statement, in Box 12, using Code DD. Many employers are eligible for transition relief for tax-year 2012 and beyond, until the IRS issues final guidance for this reporting requirement.

The amount reported does not affect tax liability, as the value of the employer excludible contribution to health coverage continues to be excludible from an employee's income, and it is not taxable. This reporting is for informational purposes only, to show employees the value of their health care benefits.

More information about the reporting can be found on Form W-2 Reporting of Employer-Sponsored Health Coverage.

Net Investment Income Tax

A new Net Investment Income Tax went into effect on Jan. 1, 2013. The 3.8 percent Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income above certain threshold amounts. On Nov. 26, 2013, the IRS and the Treasury Department issued final regulations, which provide guidance on the general application of the Net Investment Income Tax and the computation of Net Investment Income. In addition, on Nov. 26, 2013, the IRS and the Treasury Department issued proposed regulations on the computation of net investment income as it relates to certain specific types of property. Comments may be submitted electronically, by mail or hand delivered to the IRS. For additional information on the Net Investment Income Tax, see our questions and answers.

Additional Medicare Tax

A new Additional Medicare Tax went into effect on Jan. 1, 2013. The 0.9 percent Additional Medicare Tax applies to an individual’s wages, Railroad Retirement Tax Act compensation and self-employment income that exceeds a threshold amount based on the individual’s filing status. The threshold amounts are $250,000 for married taxpayers who file jointly, $125,000 for married taxpayers who file separately and $200,000 for all other taxpayers. An employer is responsible for withholding the Additional Medicare Tax from wages or compensation it pays to an employee in excess of $200,000 in a calendar year. On Nov. 26, 2013, the IRS and the Department of the Treasury issued final regulations which provide guidance for employers and individuals relating to the implementation of Additional Medicare Tax, including the requirement to withhold Additional Medicare Tax on certain wages and compensation, the requirement to report Additional Medicare Tax, and the employer process for adjusting underpayments and overpayments of Additional Medicare Tax. In addition, the regulations provide guidance on the employer and individual processes for filing a claim for refund for an overpayment of Additional Medicare Tax. For additional information on the Additional Medicare Tax, see our questions and answers.

Minimum Value

On April 26, 2012, the Department of the Treasury and IRS issued Notice 2012-31, which provides information and requested public comment on an approach to determining whether an eligible employer-sponsored health plan provides minimum value. Additionally, on April 30, 2013, the Treasury Department and the IRS issued proposed regulations relating to minimum value of eligible employer-sponsored plans and other rules regarding the premium tax credit. Starting in 2014, whether such a plan provides minimum value will be relevant to eligibility for the premium tax credit and application of the employer shared responsibility payment.

Information Reporting on Health Coverage by Employers

On March 5, 2014, the Department of the Treasury and IRS issued final regulations on employer health insurance coverage information reporting. The information reporting relates to health insurance coverage that is offered by certain employers, referred to as applicable large employers, and reporting is to be provided by each member of an applicable large employer. Additionally, on July 9, 2013, the Department of the Treasury and the IRS issued Notice 2013-45, announcing transition relief for 2014 from this annual information reporting. Learn more about this reporting requirement by reading the fact sheet issued by the U.S. Department of the Treasury.

Information Reporting on Health Coverage by Insurers

On March 5, 2014, the Department of the Treasury and IRS issued final regulations on minimum essential coverage information reporting. The information reporting is to be provided by health insurance issuers, certain sponsors of self-insured plans, government agencies and certain other parties that provide health coverage. Additionally, on July 9, 2013, the Department of the Treasury and the IRS issued Notice 2013-45 announcing transition relief for 2014 from this annual information reporting. Learn more about this reporting requirement by reading the fact sheet issued by the U.S. Department of the Treasury.

Disclosure of Return Information

On Aug. 13, 2013, the Department of the Treasury and the IRS issued final regulations with rules for disclosure of return information to the Department of Health and Human Services that will be used to carry out eligibility determinations for advance payments of the premium tax credit, Medicaid and other health insurance affordability programs. For additional information on the final regulations, see our questions and answers.

Small Business Health Care Tax Credit

This credit helps small businesses and small tax-exempt organizations afford the cost of covering their employees and is specifically targeted for those with low- and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees. On Aug. 23, 2013, the Department of Treasury and the IRS issued proposed regulations, which include information on the transition of eligibility for the credit and requiring the purchase of insurance coverage through an Affordable Insurance Exchange (also known as a Health Insurance Marketplace). Additionally, IRS Notice 2014-06 provides transition relief for employers in certain counties in Washington and Wisconsin with no SHOP coverage available. Learn more by browsing our page on the Small Business Health Care Tax Credit for Small Employers.

Application of the Affordable Care Act to Health Reimbursement Arrangements, Health Flexible Spending Arrangements and Certain Other Employer Healthcare Arrangements

The Affordable Care Act’s market reforms apply to group health plans. On Sept. 13, 2013, the IRS issued Notice 2013-54, which explains how the Affordable Care Act’s market reforms apply to certain types of group health plans, including health reimbursement arrangements (HRAs), health flexible spending arrangements (health FSAs) and certain other employer healthcare arrangements, including arrangements under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy. The notice also provides guidance on employee assistance programs or EAPs and on section 125(f)(3), which prohibits the use of pre-tax employee contributions to cafeteria plans to purchase coverage on an Affordable Insurance Exchange (also known as a Health Insurance Marketplace). The notice applies for plan years beginning on and after Jan. 1, 2014, but taxpayers may apply the guidance provided in the notice for all prior periods.  

DOL has issued a notice in substantially identical form to Notice 2013-54, DOL Technical Release 2013-03, and HHS will shortly issue guidance to reflect that it concurs with Notice 2013-54. On Jan. 24, 2013, DOL and HHS issued FAQs that addressed the application of the Affordable Care Act to HRAs.

On Jan. 9, 2014, DOL and HHS issued FAQs that addressed, among other things, future rules relating to excepted benefits.

Health Flexible Spending Arrangements

Effective Jan. 1, 2011, the cost of an over-the-counter medicine or drug cannot be reimbursed from Flexible Spending Arrangements (FSAs) or health reimbursement arrangements unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles. This standard applies only to purchases made on or after Jan. 1, 2011. A similar rule went into effect on Jan. 1, 2011, for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs). Employers and employees should take these changes into account as they make health benefit decisions. For more information, see news release IR-2010-95, Notice 2010-59, Revenue Ruling 2010-23 and our questions and answers. FSA and HRA participants can continue using debit cards to buy prescribed over-the-counter medicines, if requirements are met. For more information, see news release IR-2010-128 and Notice 2011-5. Additionally, Notice 2013-57 provides information about the definition of preventive care for purposes of high deductible health plans associated with HSAs. 

In addition, starting in 2013, there are new rules about the amount that can be contributed to an FSA. Notice 2012-40 provides information about these rules and flexibility for employers applying the new rules. On Oct. 31, 2013, the Department of the Treasury and IRS issued Notice 2013-71, which provides information on a new $500 carryover option for employer-sponsored healthcare flexible spending arrangements. Learn more by reading the news release issued by the U.S. Department of the Treasury.

Further, Notice 2013-54 provides guidance regarding the application of the Affordable Care Act’s market reforms to certain health FSAs.   

Medical Device Excise Tax

On Dec. 5, 2012, the IRS and the Department of the Treasury issued final regulations on the new 2.3-percent medical device excise tax (IRC §4191) that manufacturers and importers will pay on their sales of certain medical devices starting in 2013. On Dec. 5, 2012, the IRS and the Department of the Treasury also issued Notice 2012-77, which provides interim guidance on certain issues related to the medical device excise tax. Additional information is available on the Medical Device Excise Tax page and Medical Device Excise Tax FAQs on IRS.gov.

Changes to Itemized Deduction for Medical Expenses

Beginning Jan. 1, 2013, you can claim deductions for medical expenses not covered by your health insurance when they reach 10 percent of your adjusted gross income. This change affects your 2013 tax return that you will file in 2014. There is a temporary exemption from Jan. 1, 2013, to Dec. 31, 2016, for individuals age 65 and older and their spouses. For additional information, see our questions and answers.

Health Insurance Premium Tax Credit

Starting in 2014, individuals and families can take a new premium tax credit to help them afford health insurance coverage purchased through an Affordable Insurance Exchange (also known as a Health Insurance Marketplace). The premium tax credit is refundable so taxpayers who have little or no income tax liability can still benefit. The credit also can be paid in advance to a taxpayer’s insurance company to help cover the cost of premiums. On May 18, 2012, the Department of the Treasury and the IRS issued final regulations, which provide guidance for individuals who enroll in qualified health plans through Marketplaces and claim the premium tax credit, and for Marketplaces that make qualified health plans available to individuals and employers. On Jan. 30, 2013, the Department of the Treasury and IRS released final regulations on the premium tax credit affordability test for related individuals. On April 30, 2013, the Department of the Treasury and the IRS issued proposed regulations relating to minimum value of eligible employer-sponsored plans and other rules regarding the premium tax credit. Additionally, Notice 2013-41, issued on June 26, 2013, provides information for determining whether or when individuals are considered eligible for coverage under certain Medicaid, Medicare, CHIP, TRICARE, student health or state high-risk pool programs. This determination will affect whether the individual is eligible for the premium tax credit. On June 28, 2013, the Department of the Treasury and IRS issued proposed regulations on the new reporting requirements for Marketplaces. Notice 2014-23 was issued on March 26, 2014, and allows certain victims of domestic abuse to claim the premium tax credit while filing a return using the Married Filing Separately filing status for the 2014 calendar year. For more information on the credit, see our premium tax credit page and our questions and answers.

Individual Shared Responsibility Provision

Starting in 2014, the Individual Shared Responsibility provision calls for each individual to either have minimum essential coverage for each month, qualify for an exemption, or make a payment when filing his or her federal income tax return. On Aug. 27, 2013, the Department of the Treasury and the IRS issued final regulations on the Individual Shared Responsibility provision. On Jan. 23, 2014, the Department of the Treasury and the IRS issued proposed regulations addressing several issues that were identified in the preamble to the final regulations. In particular, the proposed regulations provide that certain limited-benefit Medicaid and TRICARE coverage is not minimum essential coverage. The proposed regulations also address the treatment of health reimbursement arrangements and wellness program incentives for purposes of determining the exemption for individuals who cannot afford employer-sponsored coverage. Comments are due April 28, 2014, and may be submitted electronically, by mail or hand delivered to the IRS. Additionally, because individuals may not be aware that these limited-benefit government health programs are not minimum essential coverage at the time of enrollment, Notice 2014-10, issued on Jan. 23, 2014, provides transition relief from the shared responsibility payment for months in 2014 in which individuals have certain Medicaid coverage or limited-benefit coverage under chapter 55 of title 10, U.S.C. For additional information on the Individual Shared Responsibility provision, the final regulations and Notice 2013-42, see our ISRP page and questions and answers. Additional information on exemptions and minimum essential coverage is available in final regulations issued by the U.S. Department of Health & Human Services. The open enrollment period to purchase health insurance coverage for 2014 through the Health Insurance Marketplace runs from Oct. 1, 2013, through March 31, 2014.

Health Coverage for Older Children

Health coverage for an employee's children under 27 years of age is now generally tax-free to the employee. This expanded health care tax benefit applies to various work place and retiree health plans. These changes immediately allow employers with cafeteria plans –– plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits –– to permit employees to begin making pre-tax contributions to pay for this expanded benefit. This also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return. Learn more by reading our news release or this notice.

Excise Tax on Indoor Tanning Services

A 10-percent excise tax on indoor UV tanning services went into effect on July 1, 2010. Payments are made along with Form 720, Quarterly Federal Excise Tax Return. The tax doesn't apply to phototherapy services performed by a licensed medical professional on his or her premises. There's also an exception for certain physical fitness facilities that offer tanning as an incidental service to members without a separately identifiable fee. For more information on the tax and how it is administered, see the Indoor Tanning Services Tax Center.

Adoption Credit

For tax years 2010 and 2011, the Affordable Care Act raised the maximum adoption credit per child and the credit was refundable. For more information related to the adoption credit for tax years 2010 and 2011, see our news release, tax tip, questions and answers, flyer, Notice 2010-66, Revenue Procedure 2010-31, Revenue Procedure 2010-35 and Revenue Procedure 2011-52.

For tax year 2012, the credit has reverted to being nonrefundable, with a maximum amount (dollar limitation) of $12,650 per child. If you adopted a child in 2012, see Tax Topic 607 for more information. 

Transitional Reinsurance Program

The ACA requires all health insurance issuers and self-insured group health plans to make contributions under the transitional Reinsurance Program to support payments to individual market issuers that cover high-cost individuals. For information on the tax treatment of contributions made under the Reinsurance Program, see our frequently asked questions.

Medicare Shared Savings Program

The Affordable Care Act establishes a Medicare shared savings program (MSSP) which encourages Accountable Care Organizations (ACOs) to facilitate cooperation among providers to improve the quality of care provided to Medicare beneficiaries and reduce unnecessary costs. More information can be found in Notice 2011-20, which solicited written comments regarding what additional guidance, if any, is needed for tax-exempt organizations participating in the MSSP through an ACO. This guidance also addresses the participation of tax-exempt organizations in non-MSSP activities through ACOs. Additional information on the MSSP is available on the Department of Health and Human Services website.

The Centers for Medicare and Medicaid Services has released final regulations describing the rules for the Shared Savings Program and accountable care organizations. Fact Sheet 2011-11 confirms that Notice 2011-20 continues to reflect IRS expectations regarding the Shared Savings Program and ACOs, and provides additional information for charitable organizations that may wish to participate.

Qualified Therapeutic Discovery Project Program

This program was designed to provide tax credits and grants to small firms that show significant potential to produce new and cost-saving therapies, support U.S. jobs and increase U.S. competitiveness. Applicants were required to have their research projects certified as eligible for the credit or grant. IRS guidance describes the application process.

Submission of certification applications began June 21, 2010, and applications had to be postmarked no later than July 21, 2010, to be considered for the program. Applications that were postmarked by July 21, 2010, were reviewed by both the Department of Health and Human Services (HHS) and the IRS. All applicants were notified by letter dated October 29, 2010, advising whether or not the application for certification was approved. For those applications that were approved, the letter also provided the amount of the grant to be awarded or the tax credit the applicant was eligible to take.

The IRS published the names of the applicants whose projects were approved as required by law. Listings of results are available by state.

Learn more by reading the IRS news release, the news release issued by the U.S. Department of the Treasury, the page on the HHS website and our questions and answers.

Group Health Plan Requirements

The Affordable Care Act establishes a number of new requirements for group health plans. Interim guidance on changes to the nondiscrimination requirements for group health plans can be found in Notice 2011-1, which provides that employers will not be subject to penalties until after additional guidance is issued. Additionally, TD 9575 and REG-140038-10, issued by DOL, HHS and IRS, provide information on the summary of benefits and coverage and the uniform glossary. Notice 2012-59 provides guidance to group health plans on the waiting periods they may apply before coverage starts. On March 19, 2013, HHS, DOL and IRS issued proposed regulations on the ninety-day waiting period limitation.. 

More information on group health plan requirements is available on the websites of the Departments of Health and Human Services and Labor and in additional guidance.

Further, Notice 2013-54 provides guidance regarding the application of the Affordable Care Act’s market reforms to certain types of group health plans, including health reimbursement arrangements (HRAs), health flexible spending arrangements (health FSAs) and certain other employer healthcare arrangements, including arrangements under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy. 

Annual Fee on Health Insurance Providers

The Affordable Care Act created an annual fee on certain health insurance providers beginning in 2014. On Nov. 26, 2013, the Treasury Department and IRS issued final regulations on this annual fee imposed on covered entities engaged in the business of providing health insurance for United States health risks.

For additional information visit our Affordable Care Act Provision 9010 - Health Insurance Providers Fee page

Tax-Exempt 501(c)(29) Qualified Nonprofit Health Insurance Issuers

The Affordable Care Act requires the Department of Health and Human Services (HHS) to establish the Consumer Operated and Oriented Plan program (CO-OP program). It also provides for tax exemption for recipients of CO-OP program grants and loans that meet additional requirements under section 501(c)(29). IRS Notice 2011-23 outlined the requirements for tax exemption under section 501(c)(29) and solicited written comments regarding these requirements as well as the application process. Revenue Procedure 2012-11, issued in conjunction with temporary regulations and a notice of proposed rulemaking, sets out the procedures for issuing determination letters and rulings on the exempt status of organizations applying for recognition of exemption under 501(c)(29).

An overview of the CO-OP program is available on the HHS website.

Medicare Part D Coverage Gap “donut hole” Rebate

The Affordable Care Act provides a one-time $250 rebate in 2010 to assist Medicare Part D recipients who have reached their Medicare drug plan’s coverage gap. This payment is not taxable. This payment is not made by the IRS. More information can be found at www.medicare.gov.

Additional Requirements for Tax-Exempt Hospitals

The Affordable Care Act added new requirements for charitable hospitals (see Notice 2010-39 and Notice 2011-52). On June 26, 2012, the IRS published proposed regulations that provide information on the requirements for charitable hospitals relating to financial assistance and emergency medical care policies, charges for emergency or medically necessary care provided to individuals eligible for financial assistance, and billing and collections. On April 5, 2013, the IRS published proposed regulations on the requirement that charitable hospitals conduct community health needs assessments (CHNAs) and adopt implementation strategies at least once every three years. These proposed regulations also discuss the related excise tax and reporting requirements for charitable hospitals and the consequences for failure to satisfy the section 501(r) requirements. On August 15, 2013, the IRS published temporary regulations and proposed regulations providing information on which form to use when making an excise tax payment for failure to meet the CHNA requirements and the due date for filing the form. Notice 2014-2 confirms that hospital organizations can rely on proposed regulations under section 501(r) of the Internal Revenue Code published on June 26, 2012 and April 5, 2013, pending the publication of final regulations or other applicable guidance. Notice 2014-3 contains a proposed revenue procedure that provides correction and disclosure procedures under which certain failures to meet the requirements of section 501(r) will be excused.

Annual Fee on Branded Prescription Pharmaceutical Manufacturers and Importers

The Affordable Care Act created an annual fee payable beginning in 2011 by certain manufacturers and importers of brand name pharmaceuticals. On Aug. 15, 2011, the IRS issued temporary regulations and a notice of proposed rulemaking on the branded prescription drug fee. The temporary regulations describe the rules related to the fee, including how it is computed and how it is paid. On Aug. 5, 2013, the IRS issued Notice 2013-51, which provides additional guidance on the branded prescription drug fee for the 2014 fee year. For information on the fee for the 2012 fee year and for the 2013 fee year, see Notice 2011-92 and Notice 2012-74.

For additional information, visit our Affordable Care Act Provision 9008 Branded Prescription Drug Fee page.

Modification of Section 833 Treatment of Certain Health Organizations

The Affordable Care Act amended section 833 of the Code, which provides special rules for the taxation of Blue Cross and Blue Shield organizations and certain other organizations that provide health insurance. IRS Notice 2010-79 provides transitional relief and interim guidance on the computation of an organization’s taxpayer’s Medical Loss Ratio (MLR) for purposes of section 833, the consequences of nonapplication and changes in accounting method. Notice 2011-04 provides additional information and the procedures for qualifying organizations to obtain automatic consent to change its method of accounting for unearned premiums. Notice 2012-37 extends the transitional relief and interim guidance provided in Notice 2010-79 for another year to any taxable year beginning in 2012 and the first taxable year beginning after Dec. 31, 2012. 

On January 6, 2014, the IRS issued final regulations that describe how the MLR for purposes of section 833 is computed.

Limitation on Deduction for Compensation Paid by Certain Health Insurance Providers (amended section 162(m))

The Affordable Care Act amended section 162(m) of the Code to limit the compensation deduction available to certain health insurance providers. The amendment goes into effect for taxable years beginning after Dec. 31, 2012, but may affect deferred compensation attributable to services performed in a taxable year beginning after Dec. 31, 2009. On April 1, 2013, the Treasury Department and IRS issued proposed regulations on this provision. 

Employer Shared Responsibility Payment

The Affordable Care Act establishes that certain employers must offer health coverage to their full-time employees or a shared responsibility payment may apply. On Feb. 10, 2014, the Department of the Treasury and the IRS issued final regulations on the Employer Shared Responsibility provisions. For additional information on the Employer Shared Responsibility provisions and the proposed regulations, see our questions and answers. On July 9, 2013, the Department of the Treasury and the IRS announced transition relief from the Employer Shared Responsibility provisions for 2014. For more information, please see Notice 2013-45. For additional transition relief generally applicable to 2015, see the preamble to the final regulations.  

Patient-Centered Outcomes Research Institute Fee

The Affordable Care Act imposes the Patient-Centered Outcomes Research Institute (PCORI). Funded by the Patient-Centered Outcomes Research Trust Fund, the institute will assist patients, clinicians, purchasers and policy-makers in making informed health decisions by advancing clinical effectiveness research. The trust fund will be funded in part by fees paid by issuers of certain health insurance policies and sponsors of certain self-insured health plans.

The IRS and the Department of the Treasury have issued final regulations on this fee. Additional information on the fee is available on the PCORI page and in our questions and answers and chart summaryForm 720, Quarterly Federal Excise Tax Return, was revised to provide for the reporting and payment of the PCORI fee.

Retiree Drug Subsidies

Under § 139A of the Internal Revenue Code, certain special subsidy payments for retiree drug coverage made under the Social Security Act  are not included in the gross income of plan sponsors. Plan sponsors receive these retiree drug subsidy payments based on the allowable retiree costs for certain qualified retiree prescription drug plans. For taxable years beginning on or after Jan. 1, 2013, new statutory rules affect the ability of plan sponsors to deduct costs that are reimbursed through these subsidies. See our questions and answers for more information.

For More Information

For tips, fact sheets, questions and answers, videos and more, see our Affordable Care Act of 2010: News Releases, Multimedia and Legal Guidance page.

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Page Last Reviewed or Updated: 26-Mar-2014

 

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