We would like to take this opportunity to describe a very important tax break approved by the IRS for owners of residential rental property and other types of buildings purchased or constructed after 1986. This tax break is called "cost segregation." The tax savings can be very substantial and realized immediately.

Most owners of residential rental property depreciate the entire cost of their building over 27.5 years. Owners of other types of buildings, such as offices, retail space, grocery stores, restaurants, warehouses, and manufacturing plants often depreciate the entire cost using a 39-year or 31.5-year depreciation period, depending upon the date of acquisition. Under IRS cost segregation guidelines, however, a significant portion of a building's cost can be depreciated over much shorter periods, usually five or seven years.

The cost segregation rules are complicated, but in brief, they allow a taxpayer to separately depreciate components of a building that are unrelated to its "operation and maintenance" over the shortened depreciation periods. In addition, these depreciation deductions are computed using an accelerated depreciation method (the "200 percent declining balance method") which allows costs to be recovered at twice the rate that applies under the "straight-line" method. The slower straight-line method is used to depreciate residential rental property and other types of buildings.

Many types of building components can qualify for the shortened depreciation period and accelerated depreciation method. It would be impossible to list them all, but common examples include molding, millwork, and other decorative elements, carpeting, wall coverings, partitions, window treatments, counters, cabinets, shelving, special lighting, specialized machinery and equipment (such as kitchen equipment), and the costs of plumbing and electrical components allocable to such equipment. In addition, certain land improvements located outside of a building may be depreciated over 15 years. Land improvements include items such as landscaping, fences, sidewalks, curbs, parking lots, lighting, utilities, signs, swimming pools, tennis courts, and playgrounds. Depending upon the type of building, you can expect to deduct between 10 and 60 percent of its cost over the shorter recovery period.

If you would like more information on cost segregation or if you feel you may benefit from a cost segregation analysis, please contact our office at your earliest convenience so that we may discuss this in greater detail.

When you enroll in coverage through the Marketplace during Open Season, which runs through Jan. 31, 2016, you can choose to have monthly advance credit payments sent directly to your insurer. If you get the benefit of advance credit payments in any amount, or if you plan to claim the premium tax credit, you must file a federal income tax return and use a Form 8962, Premium Tax Credit (PTC) to reconcile the amount of advance credit payments made on your behalf with the amount of your actual premium tax credit. You must file an income tax return for this purpose even if you are otherwise not required to file a return.

Here are four things to know about advance payments of the premium tax credit:

  • If the premium tax credit computed on your return is more than the advance credit payments made on your behalf during the year, the difference will increase your refund or lower the amount of tax you owe. This will be reported in the 'Payments' section of Form 1040.
  • If the advance credit payments are more than the amount of the premium tax credit you are allowed, you will add all or a portion of the excess advance credit payments made on your behalf to your tax liability by entering it in the 'Tax and Credits' section of your tax return. This will result in either a smaller refund or a larger balance due.
  • If advance credit payments are made on behalf of you or an individual in your family, and you do not file a tax return, you will not be eligible for advance credit payments or cost-sharing reductions to help pay for your Marketplace health insurance coverage in future years. . The amount of excess advance credit payments that you are required to repay may be limited based on your household income and filing status.
  • If your household income is 400 percent or more of the applicable federal poverty line, you will have to repay all of the advance credit payments. The repayment limits are listed in the table below. 
Repayment Limitation Table
Household Income Percentage of Federal Poverty Line Less than 200% At least 200%, but less than 300% At least 300%, but less than 400% 400% or more
Limitation Amount for Single $300 $750 $1,250 No Limit
Limitation Amount for all other filing statuses $600 $1,500 $2,500 No Limit
For more information, see the Premium Tax Credit Questions and Answers at IRS.gov/aca. You can also use our Interactive Tax Assistant tool to find out if you are eligible for the premium tax credit.

Self-employed? You may be able to deduct all health insurance costs & your spouse's too. Ask @roycpas for more info. #CPA360Tax. We are greater Bangor's premier CPA firm for tax and financial planning services!

Your health insurance company may request that you provide them with the social security numbers for you, your spouse and your children covered by your policy.  This is because the Affordable Care Act requires every provider of minimum essential coverage to report that coverage by filing an information return with the IRS and furnishing a statement to covered individuals. The information is used by the IRS to administer – and individuals to show compliance with – the health care law.