IRS Finalizes Guidance on Partial Dispositions
Author: Scott Humphrey
The last major pieces of the tangible property regulations puzzle were put in place with the release of T.D. 9689 and Rev. Proc. 2014-54, which provides guidance and accounting method change procedures to help taxpayers account for dispositions of tangible depreciable property. The tangible property regulations are comprehensive and affect virtually all businesses.
Prior to the new regulations, a taxpayer was required to depreciate a capitalized repair as an improvement and continue to depreciate the replaced component e.g., roof, windows, HVAC unit. The final regulations now offer the option for taxpayers to make an annual partial disposition election for qualifying dispositions occurring during the tax year. If a qualifying disposition occurs, taxpayers may elect to deduct the replaced component or portion of the component. In general, a partial disposition is elective; however, it is required when any of the following occurs:
- Sale of a portion of an asset
- Disposition as a result of a casualty event
- Disposition of a portion of an asset in a like-kind exchange or involuntary conversion
- Transfer of a portion of an asset in a nonrecognition transaction
Tax Planning Opportunity – Rev. Proc. 2014-54 extends the ability to make a late partial disposition election by filing an automatic accounting method change to tax years beginning before January 1, 2015. Taxpayers should analyze capitalized repairs and improvements to determine if they would benefit from making a late partial disposition election.
General Asset Accounts
A taxpayer may place an asset or group of assets in a general asset account (GAA) to ease record-keeping requirements or for tax planning purposes. Disposition of an asset in a GAA is generally ignored and the entire balance of the account is depreciated as though the disposition has not occurred. A GAA is not terminated until the last asset of the GAA is fully disposed. A taxpayer may make a qualifying disposition election for a GAA in certain situations, such as the following:
- A disposition as the direct result of a casualty event
- A charitable contribution
- A direct result of a cessation, termination or disposition of a business, manufacturing or other income producing process operation facility, plant or other unit, other than by transfer to a supplies, scrap or similar account
- Disposition in a nonrecognition transaction
Tax Planning Opportunity – In light of a new provision contained within the final regulations, taxpayers should consider placing a building in a GAA if they plan to purchase and demolish a building in the future. If a building is not placed into a GAA and demolished, the remaining basis in the building is capitalized into the land and not depreciated. If the building is placed into a GAA, the building would continue to be depreciated until the building is disposed or fully depreciated. Also, a fiscal-year taxpayer may be eligible to make a late GAA election under the temporary regulations. Please consult your tax advisor before placing an asset in a GAA, as there are potential disadvantages of making the election.
The final regulations offer taxpayers opportunities to accelerate or defer tax deductions. It is important to analyze the regulations as they apply to your specific facts and circumstances. To learn more about how these regulations could affect your business, contact your BKD advisor.