Recently the Treasury Department released Revenue Procedure 2014-17. This procedure modified and superseded previous procedures regarding certain changes in method of accounting for dispositions of tangible depreciable property.
Most importantly for purposes of the 2013 tax filing season, this revenue procedure confirms that the IRS will allow taxpayers to make a late election for partial dispositions by using a Form 3115 (Change in Method of Accounting); however, this late election for partial dispositions can only be made for the 2013 tax year. After 2013, taxpayers will have to make the election in the year the disposition occurs, and will no longer be able to make late elections. Prior to the release of this revenue procedure, it was not clear whether taxpayers would be able to make late partial disposition elections after the 2013 tax year. This procedure clarifies that, barring future changes by the Treasury Department, taxpayers only have this year to take advantage of the opportunity.
How does this apply to my business?
This revenue procedure confirms that taxpayers have an opportunity for the 2013 tax year to take deductions for items that were disposed of in prior years, with no limit on the number of years they can go back. 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 2013 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 2013 return.
This means that taxpayers should examine past disposition activity to determine if making this 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 an opportunity to take advantage of this election for the 2013 tax year. Given the limited period of time taxpayers have for the 2013 tax year (and many have likely already filed their returns), those taxpayers who cannot obtain the information necessary to determine if making the election is appropriate should consider filing an extension for the 2013 tax return to give them more time to do so.
How do I calculate the value of “part” of an asset?
For those taxpayers who can take advantage of this late election, they will have to calculate the value of the disposed part of the asset (i.e. the value of the old roof). This can be a difficult undertaking given that most taxpayers do not have a record of the component costs of their assets. The proposed regulations on dispositions require taxpayers to use any reasonable method to calculate this value and give three examples of reasonable methods. These include:
1) Discounting the cost of the replacement portion of the asset back to its placed-in-service-year cost using the Consumer Price Index;
2) A pro rata allocation of the unadjusted depreciable basis of the asset based on the replacement cost of the disposed portion of the asset and the replacement cost of the asset; and
3) A study allocating the cost of the asset to its individual components (i.e. cost segregation study).
It is important to note that if you have disposed of more than one portion of the same asset, then you have to apply the same calculation method to all portions of that asset.
The regulations are continuing to evolve
The Treasury Department plans to release another revenue procedure on this subject, along with the final regulations on dispositions, in late April or early May of this year. Clark Schaefer Hackett will keep you updated with any further developments in this regard. Please feel free to reach out to your advisor, or any CSH professional, with any questions.
You may want to know more about the various ways that CSH can support your tangible property compliance. For instance, we can create a compliance plan that positions your business for tax efficiency while minimizing your staff’s time and effort in addressing the changes. Called a Fixed Asset Review, this personalized report will explain the exact steps to take to implement compliance with the tangible property regulations to your advantage, based on your specific circumstances.