On Aug.18, 2014, the U.S. Department of the Treasury finalized regulations addressing accounting for the disposal of tangible property. The regulations are effective for tax years beginning on or after Jan. 1, 2014, and are the final piece of the tangible asset regulations.
The final regulations allow taxpayers to deduct the cost of an asset or a component of an asset when it is replaced or retired from service. A partial disposition deduction is available even if the component was not identified as a separate asset before its disposition. The final regulations largely retain the rules set forth in the proposed regulations issued in September 2013, with a few clarifications and modifications.
The regulations clarify the rules for computing the adjusted basis of a disposed component to determine the deductible amount. They require taxpayers to look first at their internal records to determine the component’s basis. Taxpayers then are allowed to use a “reasonable method” for estimating the basis if the information cannot be determined via their internal records or does not exist. The reasonable method outlined in the regulations allows the cost of the replaced property to be estimated using the current replacement cost, which is discounted using the Producer Price Index (PPI) for inflation back to the date the component originally was placed into service. In a modification to the proposed regulations, the replacement cost method cannot be used in the case of a betterment, such as the replacement of the retired or disposed asset with new property that is more productive or more efficient than the old property. Additionally, the replacement cost method cannot be used when the new property adapts the existing property to a new use. Using PPI is a change from the proposed regulations, which instead used the Consumer Price Index for discounting computations.
Taxpayers generally are required to capitalize a building’s cost to their basis in the underlying land when a building is demolished. The final regulations stipulate that those capitalization rules do not apply when a taxpayer has put a building into a general asset account (GAA) and does not elect to terminate the GAA when the property is demolished. In the case of a GAA, no loss is taken on the building’s demolition and depreciation of the building continues.
The regulations continue to allow a taxpayer annually to elect to recognize an asset’s partial disposition by reporting the gain, loss, or other deductions in the taxpayer’s timely filed original federal tax return (including extensions) for the taxable year in which the portion of the asset is disposed by the taxpayer. The regulations provide that taxpayers can make a late partial disposition election for their 2012 and 2013 tax returns either by filing an amended tax return for the applicable year within 180 days after the extended due date or by filing a method change for the first or second tax year after the applicable tax year. It is anticipated the additional transition guidance will provide for an expanded use of the late partial disposition election to tax years beginning in 2014.
Taxpayers should consider carefully the effects the final disposition rules might have for them and evaluate the opportunities to make a late partial disposition election.
The property disposition regulations are the last remaining major guidance in the overall tangible property regulations guidance plan, as the bulk of the regulations were finalized in 2013. Since all of the regulations are effective for the 2014 tax year, taxpayers should begin planning their adoption approach so they are compliant for their first effective year.