By Andy Biebl
DTN Tax Columnist
DTN Tax Columnist Andy Biebl is a CPA and principal with the accounting firm of CliftonLarsonAllen LLP in New Ulm and Minneapolis, Minn., and a national authority on agricultural taxation. To pose questions for upcoming columns, email AskAndy@dtn.com. To register for Andy's one-hour, pre-recorded webinar on what small business owners need to know about the Affordable Care Act, go to http://www.dtn.com/…
In a column you wrote in 2013, you mentioned that a farmer could fully depreciate a 2013 Silverado pickup using the Section 179 allowance. Is this true for 2014 also?
There are limits on the amount of depreciation that can be claimed annually for vehicles. In general, cars and light trucks are limited to an annual amount in the range of $3,000-$5,000 per year. But heavier vehicles, defined as having a Gross Vehicle Weight Rating or GVWR over 6,000 pounds, have special limitations. An SUV and a short-box pickup are allowed a $25,000 first year Section 179 deduction. A full-size pickup (defined as having an open cargo area of at least 6 feet and an over-6,000 pound GVWR), may have an unlimited Section 179 deduction.
The wild card in your question is what actual limit will apply to the Section 179 deduction in 2014. At present, an old limit of $25,000 is technically the tax law. However, we expect Congress to treat the Section 179 limit as one of its many "extender" provisions that will be updated for 2014 in upcoming legislation. Our expectation is that the large $500,000 limit that applied during the recent recession years will be eased back, but it's anybody's guess as to what the new number will be. One possibility is in the $140,000 range; this represents the pre-recession amount with six years of inflation indexing. If so, that 2014 Silverado, which might be a $40,000 vehicle, could be fully expensed under Section 179.
I read your column in the February 2014 Progressive Farmer and would like clarification regarding employer medical reimbursement plans. You state that employer reimbursements of premiums and employer medical reimbursement plans with two or more employees are now prohibited under the Affordable Care Act mandates. I had understood that only larger employers with 50 or more employees were affected by the ACA. We have a small farm and are trying to get one person to work for us, but if the ACA applies to us, the cost could be prohibitive.
There are multiple mandates under the ACA, and in the case of your question, there are two separate mandates in play. First, the mandate for those who employ 50 or more full-time and full-time equivalent employees is a requirement to provide group health insurance. If that large employer fails to provide the health insurance, a $2,000 per full-time employee penalty applies annually. This mandate is under Internal Revenue Code Sec. 4980H.
The mandate that affects almost all employers, including small employers, is imposed under IRC Sec. 4980D, and is a very costly $100-per-day-per-employee penalty ($36,500 per year per individual!). This applies if there is an employer payment of employee individual health insurance premiums or an employer-paid medical reimbursement arrangement for two or more participants who are current employees (Sec. 9831 of the tax code). This is the surprise that appeared in a late 2013 IRS release (Notice 2013-54), and which is proving to be such a harsh result for many small businesses throughout the country.
In your situation, you indicate that you are considering adding your first employee. If you are a proprietor and not an employee of your own business, and you hire one outside individual who becomes an employee, you only have a one employee plan and you may continue to do what was permissible in the past: reimburse some or all of the individual's health insurance premium and also add a Section 105 out-of-pocket medical reimbursement plan. But, on the other hand, if you are conducting your farming activity in a corporation and you are an owner-employee receiving a W-2, you would be adding a second employee, and are exposed to the very expensive $100-per-day penalty if you attempted to provide tax-free health benefit reimbursements. If this is the case, your only alternative is to provide a group health insurance contract to both employees (you and the new worker), or alternatively, treat all medical reimbursements as taxable wages rather than as tax-free fringe benefits.
We have a family C corporation with three family members as employees. Having read some of your material about the new ACA penalties, it sounds like we have two choices. The corporation may not treat the individual employee premium reimbursements as a tax-free fringe benefit (so it is a dividend?), or we can go to a group health insurance policy instead. What are the tax results under these two alternatives?
If you continue to maintain individual health insurance policies and the corporation reimburses them, you do not want to do so as a tax-free fringe benefit. This brings into play the very expensive $100-per-day-per-employee "market reform" penalty of the ACA. Instead, we recommend that the premium amounts simply be added to the wages of each employee. That produces a tax deduction to the corporation and compensation income to the employee, and also causes additional payroll taxes. This is a better approach than a nondeductible dividend, because the corporation would lose the tax deduction, and the individual would still have taxable income for the benefit paid by the corporation.
If you go to a group policy, the premiums paid by the corporation are tax deductible and the individuals receive a tax-free fringe benefit. This is a very good tax answer, but needs to be weighed against the likelihood of more expensive premiums under ACA group policies.
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