On Thursday, September 18th, the IRS released a revenue procedure that is expected to be the final pronouncement from the IRS on the tangible property regulations: the group of regulations addressing how taxpayers account for the acquisition, production, or improvement of tangible property.
Revenue Procedure 2014-54 modifies Revenue Procedures 2011-14 and 2014-17, and sets forth the procedures by which a taxpayer may obtain automatic consent to change to the methods of accounting provided in Reg. sections 1.168(i)-1, 1.168(i)-7 and 1.168(i)-8, which govern dispositions and general asset accounts under the Modified Accelerated Cost Recovery System (MACRS).
The procedure is a 12-month extension of a previous opportunity. It now gives taxpayers the ability to make late partial disposition elections for tax years beginning prior to January 1, 2015. Thereafter, taxpayers will have to make the election in the year the disposition occurs and will no longer be able to make late elections. This represents a window of opportunity for many taxpayers.
Why this may be significant to you
The MACRS regulations indicate that the late partial disposition election can be applied to tangible real or personal property dispositions. For example, if you replaced the roof on your building in 2010 but did not deduct the cost of the old roof, you could take a deduction for that cost on the 2014 return. If you replaced an engine on a truck, but did not deduct the cost of the old engine, you could take a deduction for that cost on the 2014 return.
That’s because the MACRS regulations, which were released in proposed form in September, 2013 and finalized in August of this year, set forth guidance on the treatment of assets that are disposed of and clarify when a disposition has occurred. The regulations also give taxpayers the ability to dispose of part of an asset. This “partial disposition rule” allows taxpayers to claim a loss on the disposition of a component of an asset without having identified the component as an asset prior to the disposition taking place.
Revenue Procedure 2014-17, which was released in February of this year and addresses accounting method changes under the proposed MACRS regulations, allowed taxpayers to make a late partial disposition election for dispositions that occurred in prior years. Thus, taxpayers could deduct in the current year the remaining basis of parts of assets that had not been previously identified and had been disposed of in prior years, which was a deduction that had not previously been available. However, Revenue Procedure 2014-17 indicated that this late partial disposition election could only be made for the 2013 tax year. For tax years beginning on or after January 1, 2014, taxpayers would only be able to make the partial disposition election for dispositions that occurred during that tax year.
The steps you should take
The extension of this opportunity means that taxpayers should examine past disposition activity to determine if making the election is beneficial. Activities such as building remodels, roof replacements, parking lot replacements, and other activities where assets were disposed of are examples of good opportunities. If those assets are still being depreciated, there may be a chance to take advantage of this election for the 2014 tax year.
Your Clark Schaefer Hackett advisor can assist you with this examination.