Form 3115–A must before you can file your Tax Returns
In plain language….as composed by Donna Cox, EA of T. Dennis Connally’s office.
In 2006 the IRS first proposed the so-called repair regulations. It is unlikely that the IRS would have spent nearly a decade focused on this area without the expectation that Form 3115 Application for Change in Accounting Method would be filed in a number of scenarios. These regulations were finalized September 2014. The IRS has stated outright that the final regulations affect all taxpayers that acquire, produce, or improve tangible property.
Once a business or rental property uses a method of depreciation, capitalization of assets, expensing of materials and supplies, and accounting for repairs and maintenance (old rules) it has adopted a method of accounting. September 2014 the IRS finalized new rules for what and how tangible assets you own and dispose of (computers, cars, and real estate) must be treated. In order to CHANGE YOUR METHOD OF ACCOUNTING from the old rules to the new rules, you MUST request permission from the Commissioner of the Internal Revenue Service by filing a Form 3115.
Whenever a business or rental property changes the method of accounting to arrive at the reportable income for tax purposes it is REQUIRED to seek consent from the Commissioner of the Internal Revenue Service. The user fee due to the IRS for this consent is $7,000.00. This fee has been waived for companies filing Form 3115 by the due date, including extensions, of their 2014 tax return through a pre-approved method referred to as: automatic consent.
Andrew Keyso, Jr. IRS Associate Chief Counsel (Income Tax and Accounting), stated on November 5, 2014 that barring a situation in which the taxpayer has taken aggressive positions in the past or has in no way applied a proper capitalization method, the IRS is unlikely to have much interest in examining a taxpayer’s zero Section 481(a) adjustment, but is most interested in ensuring that taxpayers are applying the regulations correctly from now on.
It has been noted that all companies that file a 2014 return, other than an initial return, and do not have a Form 3115 attached, will be audited.
Practitioners who prepare returns for clients that have not implemented the repair Regulations (e.g., filing Form 3115 or including certain election statements) may not willingly sign tax returns. Furthermore, failure to comply with Circular 230 could subject these tax practitioners to censure, suspension, or disbarment of practice before the IRS.
HEALTH LAW IS CREATING A TRICKER TAX SEASON
Beginning January 1, 2014, the Affordable Care Act (ACA) required individuals to carry minimum essential health coverage or make a shared responsibility payment, unless exempt. Individuals will report on their 2014 federal income tax return if they had minimum essential health coverage for all or part of the year. Individuals who file Form 1040, U.S. Individual Income Tax Return, will indicate on Line 61 if they were covered by minimum essential health coverage for 2014, if they are exempt from the requirement to carry minimum essential health coverage or if they are making an individual shared responsibility payment.
Minimum essential coverage
Minimum essential coverage is a term used to describe the type of coverage an individual needs to have to meet the individual responsibility requirement under the ACA. Nearly all individuals covered by employer-sponsored health insurance are treated under the ACA as carrying minimum essential coverage. Coverage obtained through the ACA Marketplace as well as Medicare, TRICARE and the Children’s Health Insurance Program (CHIP) qualifies as minimum essential coverage. An important exception to minimum essential coverage is coverage that provides limited benefits, such as stand-alone dental insurance, accident or disability income insurance and workers’ compensation insurance. If you have any questions whether your health coverage is minimum essential coverage requirement, please contact our office.
The ACA sets out a number of categories of individuals exempt from the individual shared responsibility requirement:
• Members of Certain Religious Sects
• Short Coverage Gap
• Certain Noncitizens
• Coverage is Considered Unaffordable
• Household Income below the Return Filing Threshold
• Members of Federally-Recognized Native American Nations
• Members of Health Care Sharing Ministries
• Incarcerated individuals
Many of these exemptions are quite technical and have various sub-categories of exemptions. Some exemptions are available only through the ACA Marketplace, others only from the IRS
and others from either the ACA Marketplace or the IRS. Please contact our office for more information about a particular exemption and how to apply for an exemption.
Shared responsibility payment
For 2014, the individual shared responsibility payment is the greater of:
• One percent of household income that is above the tax return filing threshold for the individual’s filing status; or
• The individual’s flat dollar amount, which is $95 per adult and $47.50 per child, limited to a family maximum of $285, but capped at the cost of the national average premium for a bronze level health plan available through the Marketplace in 2014.
For 2014, the annual national average premium for a bronze level health plan available through the Marketplace is $2,448 per individual ($204 per month per individual), but $12,240 for a family with five or more members ($1,020 per month for a family with five or more members).
Here is an example from the IRS:
Emma and Noah are married and have two children under 18. The couple did not have minimum essential coverage for any family member for any month during 2014 and no one in the family qualified for an exemption from the individual shared responsibility requirement. For 2014, their household income is $70,000 and their filing threshold is $20,300. The IRS explained that to determine their individual shared responsibility payment using the income formula, the couple would subtract $20,300 (filing threshold) from $70,000 (2014 household income). The result is $49,700. One percent of $49,700 equals $497. The couple’s flat dollar amount is $285, or $95 per adult and $47.50 per child. The total of $285 is the flat dollar amount in 2014. The family’s annual national average premium for bronze level coverage through the Marketplace for 2014 is $9,792 ($2,448 x 4). Because $497 is greater than $285 and is less than $9,792, their shared responsibility payment is $497 for 2014, or $41.41 per month for each month the family is uninsured (1/12 of $497 equals $41.41).
Please contact our office for more information about the ACA’s individual shared responsibility requirement.