Small Business Taxes & ManagementTM--Copyright 2014, A/N Group, Inc.
In some circumstances the law allows a deduction for capital expenditures to install special equipment to alleviate or prevent a physical or mental defect or illness. For example, a ramp for wheel chair access. But it's not that easy. You've got to prove the installation of the equipment was primarily for the treatment of medical ailments and then only to the extent it does not increase the value of your property. For example, lowering kitchen cabinets and counters for wheelchair access would most likely not increase the value of your home (possibly just the opposite). But what about the installation of a swimming pool? A gym in your basement? The answer will depend on the facts and circumstances.
Facts Are Critical
In Charles Paul Le Beau (T.C. Memo. 2014-198) the taxpayer claimed medical expense deductions for costs he paid to build and maintain a pool that he claims to have used for therapeutic purposes. The only evidence the taxpayer presented to support the medical purpose for the expense is his testimony that doctors told him to lose weight. The Court noted that a taxpayer may deduct a capital expenditure as a medical expense in the year of payment, but only to the extent the expenditure exceeded the increased in value of the underlying property. The Court went on to say the taxpayer presented no evidence concerning when he paid for the pool and whether the expenditure exceeded the resulting increase in the value of the property. Finally, the taxpayer failed to prove the pool was used primarily for the treatment of medical ailments. The Court sided with the IRS in denying a deduction.
On the other hand, in two earlier cases (Richard A. Polacsek et ux., T.C. Memo. 1981-569; and Herbert Cherry et ux., T.C. Memo. 1983-470) the taxpayers were able to deduct at least part of the cost of a pool and the associated maintenance.
In the first case, the taxpayer installed a pool in his backyard at a cost of some $10,500. The taxpayer suffered from a condition that left him with little residual breathing power. The pool was used constantly by the taxpayer, allowing him to increase his breathing power through exercise. Since this was the pool's only purpose, it was constructed with a depth of only 4 feet, was 14-feet wide and 28-feet long. It had no improvements such as copings or diving boards, and was limited to swimming or wading. The pool took up the greater portion of the backyard.
When the home was put on the market two years later the appraiser estimated the pool added $4,000 to the value of the property. The taxpayer testified the buyers were reluctant to purchase the property because they had an infant child. The taxpayer argued that he should be able to deduct the full value of the pool because he believed it did not add, but rather reduced the value of the property, taking up too much of the outdoor space and making it unattractive.
The Court did not buy that argument. The Court did, however, accept the $4,000 value for the pool the appraiser arrived at and allowed a $6,500 medical deduction. The Court also noted the credentials of the appraiser including the fact that he was qualified as an expert appraiser in various Maryland courts and had been a licensed realtor for over 25 years.
In the second case the taxpayer was diagnosed with severe emphysema and bronchitis. His doctor told him to quit smoking and to develop an exercise regime to regain breathing capacity. The doctor recommended swimming as the best exercise for someone in his condition. The taxpayer stopped smoking and investigated several forms of exercise. He tried jogging, riding an exercise bike and performing exercises. He was unable to do these because they placed too much strain on his body. He tired swimming and found it placed less strain on his body but provided ample opportunity to exercise.
The taxpayer could not arrange a swimming program at a pool in his community. He investigated the availability of pools at local health spas and "Ys", but was unable to locate a pool which offered swimming at a time which would fit into his schedule. He was the president of a closely held business and actively managed most facets of the business. In addition, the taxpayer commuted to New York City from Long Island, increasing the length of his workday.
The taxpayers decided to install their own pool so he could swim regularly. In order to accommodate the pool they purchased a lot and built a house with an indoor pool. The pool was 20 feet wide and 40 feet long and the room was 2200 square feet. The pool and pool room cost $40,000 to complete; the remainder of the house $90,000. The taxpayer's kept the water and air temperature at 80 degrees; the remainder of the house was at 70 degrees.
The taxpayer originally wanted a lap pool, restricting it to distance swimming, but built the larger pool because it was the longest he could construct while being relatively cheap to enclose. The taxpayer swam in the pool twice a day. His wife used the pool occasionally to relieve arthritis pain under a doctor's recommendation. The taxpayers' sons occasionally swam in the pool. The taxpayers never entertained in the pool room, but their sons used it twice for parties.
The taxpayers deducted the maintenance costs of the pool and some capital expenditures (the pool was constructed prior to the year at issue).
The Tax Court found operating and maintaining the pool was directly related to the taxpayer's medical condition and that the primary purpose of the pool was to provide medical care. After the doctor's recommendation to swim the taxpayers did not immediately install a pool, first seeking less expensive exercise options and then other alternatives such as a community pool. The regular use of the pool for medical purposes and the very occasional use for nonmedical purposes convinced the Court the primary purpose of the pool was medical. The IRS argued the primary purpose was recreation and personal convenience. The Court disagreed. While there was no special equipment associated with the pool, none was needed for his condition. The Court also found that no pools were available to allow the taxpayer to maintain his work and exercise schedule. He did not have to alter his employment to become entitled to a medical expense deduction. The Court noted distinctions from an earlier case (Haines where the deduction was disallowed. Here the taxpayer used the pool daily while in the earlier case the pool could only be used from April through October because it was not enclosed. In addition, that taxpayer had other options both as to exercise and use of a pool. In another case Worden family members made regular use of the pool.
The Court allowed a deduction for maintenance of the pool, but disallowed some of the claimed deductions because of lack of substantiation. Other deductions were reduced as a result of the Court's allocation. For example, the taxpayers arbitrarily allocated one-half of their homeowners insurance to the pool. The Court allocated the cost based on the cost of the pool and enclosure to the cost of the entire house. Heating oil was allocated based on square footage. Some expenditures were considered capital in nature and were not allowed because the taxpayers did not provide any evidence that the expenditures exceeded the increase in the value of the property.
Modifications to your home for items such as a stair lift, ramps to bypass stairs to get into the home, go between rooms, etc. qualify. Installing a special tub or a shower with no lip to allow wheel chair access, widening door openings, special door hardware, lowering kitchen cabinets, special faucets and other plumbing fixtures, special appliances, etc. all should qualify for a medical deduction. Any maintenance expense of these items should also be deductible. While it may be clear in many cases that the expenditure doesn't add value to the home (e.g., special plumbing fixtures), it may still be a good idea to get the opinion of an appraiser.
What about a gym in the basement or rec room? There could be circumstances where the cost of the equipment and modification of the space would be deductible. For example, where a doctor recommends special exercise and you can't get to a gym because of physical restrictions.
As was obvious in the three cases above, the outcome will depend on the facts and circumstances. The taxpayer who built the indoor pool didn't just take his doctor's advice and decide he needed to have a pool in his house. He first tried other options and built his own only when the other options failed. If he worked out of his house the deduction might not have been allowed because he could have used a local gym. (Note that two cases where the taxpayers won were from the early 1980's. Gyms are more available and open later today.) Both taxpayers had a good set of facts on their side. You can often do the same. It helps if the doctor specifically recommends the action you take. That could be swimming, special exercise equipment, etc.
One of the requirements of the expenditure is that it is primarily for medical reasons. You're unlikely to add a ramp to your front door for other than medical reasons. But the same is not true of a swimming pool or gym. Primarily means more than 50% of the time. In one case the court allowed minor recreational use by the taxpayer. If you can clearly show any recreational use was de minimus, you may not have to document the use. But the larger the percentage of nonmedical use, the more important some sort of documentation becomes. Keeping a log of your activities can help your position.
Because the floor for deducting medical expenses is high, many taxpayers aren't able to break the threshold. When the IRS sees a $21,000 expense it'll probably increase your audit chances. Make sure you have all the required documentation, an appraisal from a qualified appraiser regarding the increase in the value of the property, and make a reasonable effort to allocate any expenses.
Copyright 2014 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 12/12/14