Recently, the IRS Large Business and International division highlighted five issues that it will be targeting in its “compliance campaign” audit strategy this year. One of the issues on its radar is the partial disposition election for buildings and its structural components. Treasury Regulations provide guidelines for recognizing gain or loss on the disposition of MACRS property as well as rules for the partial dispositions of assets (Regs. Sec. 1.168(i)-8(d)(2)). The IRS is concerned that taxpayers are not appropriately recognizing the gain or loss on partial dispositions of the building and its structural components as per the disposition regulations.

In order to take a partial disposition, the taxpayer should be able to verify the following:
1) Disposed of a portion of a MACRS asset owned by taxpayer
2) Identified the asset that was partially disposed
3) Determined the placed-in-service date of the partially disposed asset
4) Determined the adjusted basis of the disposed portion
5) Reduced the adjusted basis of the asset by the disposed portion

KBKG’s Online Partial Disposition Calculator

KBKG’s Online Partial Disposition calculator was created as a turnkey solution allowing CPA’s and taxpayers to estimate the unadjusted depreciable basis of a building component that has been disposed, to claim partial disposition deduction. The calculator was created because of the difficulty in determining the tax basis of each component without a cost segregation study.

The calculator is based on an IRS approved discounting method using the Producer Price Index (PPI), as per (T.D. 9689 Guidance Regarding Dispositions of Tangible Depreciable Property). KBKG’s calculator takes the “replacement cost” of the new component and discounts it back to the place-in service date of the original disposed component. The calculator accounts for the condition of the asset (at the time it was acquired), which is based on effective age and normal life. Remember, the PPI approach is only applicable for improvements deemed as “restorations”. If the improvement is a “betterment” or an “adaptation”, please contact KBKG to assist with determining the partial disposition basis using engineering and estimation principles.

Author: Harry Sahi

Download Article: Partial Disposition Election for Buildings Being Targeted by IRS