On September 18, the IRS released an advanced copy of Rev. Proc. 2014-54, which provides guidance on certain changes in method of accounting for dispositions of tangible depreciable property. One of the most notable changes in this 93-page document is that the time for making a late partial disposition election has been extended for one year.
Background: A partial disposition election allows taxpayers to treat the retirement of structural components of a building (e.g., a roof) as a disposition, thus enabling the taxpayer to claim a loss on the remaining cost basis of that component. Whereas a partial disposition election covers dispositions in the current tax year, a late partial disposition election allows taxpayers to go back in prior years and remove previously retired components.
What’s New: Prior to Rev. Proc. 2014-54, late partial dispositions were only allowed for tax years beginning January 1, 2012 through 2013. The new Rev. Proc. extends by one year the period to make a late partial disposition election. In essence, taxpayers now have the 2014 tax year to scrub their fixed asset for opportunities to take losses on disposed structural components.
Other notable changes include:
- Removing section 6.19 (lessor improvements abandoned at termination of lease) because it is obsolete;
- Revising section 6.29 (disposition of a building or structural component) to provide that such section does not apply to any demolition of a structure to which § 280B and § 1.280B-1 apply;
- Revising sections 6.32 (general asset account elections), 6.34 (revocation of a general asset account election), and 6.35 (partial dispositions of tangible depreciable assets to which the IRS’s adjustment pertains) to allow these changes in method of accounting to be made under § 1.168(i)-1 or § 1.168(i)-8;
- Revising section 6.33 (late partial disposition election) to allow a late partial disposition election under § 1.168(i)-8 to be treated as a change in method of accounting for a limited period of time;
- Inclusion of charts that summarize the changes in methods of accounting that may be made under Rev. Proc. 2011-14 for dispositions of MACRS property.
ACTION NEEDED: For 2014 tax returns, taxpayers should identify all prior year retirements that are still being capitalized. This generally occurs anytime an existing building or machine is improved or renovated as older components are demolished or removed to accommodate new ones. KBKG recommends reviewing your fixed asset schedules where renovation or improvement costs exceed $500,000. Even if a cost segregation study has already been performed, additional deductions are available. In addition to claiming immediate retirement deductions, this process will also eliminate paying recapture tax on 1245 & 1250 building components that no longer exist. » Read KBKG’s case study on the retirement of structural components
For companies with hundreds or thousands of fixed assets, managing this effort may require assistance from a 3rd party team such as KBKG who can efficiently handle the process of gathering, analyzing, documenting, and securing any missed deductions. Using our proprietary software, we can quickly review your fixed asset records and determine how these regulations will affect your company’s tax liability.
To find out if the new Repair vs. Capitalization regulations will benefit you, visit KBKG.com/assetretirement
To schedule a call with one of our subject matter experts, please contact your KBKG account manager or visit KBKG.com/repair-regulations.
This article was written by Gian Pazzia & Alex Bagne. Published for Accounting Today with permission at: http://www.accountingtoday.com/news/irs-watch/irs-extends-deadline-retirement-loss-deductions-tangible-property-72043-1.html