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Final regs make changes for multiple/general asset account MACRS property dispositions

T.D. 9689, 08/14/2014; Reg. § 1.165-2, Reg. § 1.168(i)-1, Reg. § 1.168(i)-7 , Reg. § 1.168(i)-8, Reg. § 1.263(a)-3, Reg. § 1.1016-3

IRS has issued final regs on the disposition of Modified Accelerated Cost Recovery System (MACRS) property. The final regs, which largely follow 2013 proposed regs, make two changes to the proposed regs, including a change in the manner of making certain disposition elections when Code Sec. 280B (dealing with the demolition of structures) applies for assets included in a general asset account.

Background. In Dec. 2011, IRS issued temporary regs in T.D. 9564 that provided rules that established MACRS multiple asset accounts (Reg. § 1.168(i)-7T), revised and greatly expanded the MACRS general asset account rules (Reg. § 1.168(i)-1T), and provided rules for dispositions of MACRS property (Reg. § 1.168(i)-8T; Reg. § 1.168(i)-1T).

Multiple asset accounts and general asset accounts both allow taxpayers to simplify MACRS depreciation by placing like assets acquired at the same time into group accounts and, in effect, depreciating the group account as if it were a single asset.

No loss is recognized on the disposition of an asset that is in a general asset account. (Reg. § 1.168(i)-1(T(e)(2))

Although the temporary regs initially were effective for tax years beginning after Dec. 31, 2011, their effective date was later changed to be tax years beginning on or after Jan. 1, 2014, while permitting taxpayers to choose to apply them to tax years beginning on or after Jan. 1, 2012 and before the applicability date of the final regs.

In 2013, IRS issued proposed reliance regs that covered most of the same subjects as the temporary regs.  The proposed regs made significant changes to the temporary regs, including providing that:

  • A building (including its structural components), a condominium (including its structural components), or a cooperative (including its structural components) is a single asset for disposition purposes. This rule allows taxpayers to forgo recognition of a loss upon the disposition of a structural component of a building without making a general asset account election. (Prop Reg § 1.168(i)-1(e)(2)(viii)(B))
  • The disposition rules apply to a partial disposition of an asset (for example, the disposition of a roof). This rule allows taxpayers to claim a loss upon the disposition of a structural component of a building or upon the disposition of a component of any other asset without identifying the component as an asset before the disposition event. (Prop Reg § 1.168(i)-1(d)(1))

Under Code Sec. 280B, the cost of demolishing a building must be capitalized as part of the land cost.

Final regs make only a few changes to proposed regs. To a very large extent, the final regs retain the rules from the proposed regs. However, the final regs do make the following changes to the proposed regs:

Disposition elections for assets included in a general asset account when Code Sec. 280B applies. The final regs retain the rules in the proposed regs on the manner of making of two elections – an “election to terminate a general asset account” or a “qualifying disposition election” – to terminate a general asset account. The final regs provide that a taxpayer making either of these elections must apply Code Sec. 280B to determine whether and to what extent gain or loss is recognized. Generally, a taxpayer makes these elections by reporting the gain, loss, or other deduction on the taxpayer’s timely filed original Federal tax return (including extensions) for the tax year in which the disposition occurs.

In the case of a loss sustained on account of the demolition of a structure to which Code Sec. 280B applies, however, the loss is capitalized to the land on which the demolished structure was located, and no gain or loss is reported at the time of demolition. Nevertheless, a taxpayer generally will report a depreciation deduction for the demolished structure for the tax year in which the demolition occurs.

Accordingly, the final regs clarify that a taxpayer makes either of the two elections by ending depreciation for the demolished structure at the time of disposition (taking into account the applicable convention) and reporting the depreciation amount for that structure for the tax year in which the disposition occurs on the taxpayer’s timely filed original Federal tax return (including extensions) for that tax year. (Reg. § 1.168(i)-1(e)(3))

Determination of basis of disposed asset. The proposed and temporary regs provided that, if the disposed asset is in a general asset account, is in a multiple asset account, or is a component of a larger asset, and it is impracticable from the taxpayer’s records to determine the unadjusted depreciable basis of the disposed asset, the taxpayer may use any reasonable method that is consistently applied to the taxpayer’s general asset accounts, multiple asset accounts, or larger assets, as applicable.

The final regs provide that the taxpayer may use any reasonable method that is consistently applied to all assets in the same multiple asset account. IRS expects that reasonable methods are available that use information readily available or known to the taxpayer and do not necessitate undertaking an expensive study. (T.D. 9689, 08/14/2014)

The final regs also provide nonexclusive examples of reasonable methods. These examples are the same examples in the proposed regs, except that the final regs do not include discounting the cost of the replacement asset by the Consumer Price Index as an example of a reasonable method. After further review, IRS determined that the Producer Price Index for Finished Goods (and its successor, the Producer Price Index for Final 11 Demand) more accurately reflects inflation for capital expenditures.

The final regs also clarify that discounting the cost of the replacement asset using the Producer Price Index for Finished Goods is a reasonable method only if the replacement asset is a restoration under Reg. § 1.263(a)-3(k) and is not a betterment under Reg. § 1.263(a)-3(j) or is not an adaptation to a new or different use under Reg. § 1.263(a)-3(l).

The final regs also provide rules to determine the unadjusted depreciable basis of the disposed portion of an asset when the partial disposition rule applies. While these rules retain most of the rules in the proposed regs, the final regs were changed to clarify when a taxpayer may use a reasonable method for determining the unadjusted depreciable basis of a disposed portion of an asset.

IRS intended to allow taxpayers to use a reasonable method under the same circumstances as described above for determining the unadjusted depreciable basis of a disposed asset in a multiple asset account. However, the proposed regs did not reflect this intent.

Consequently, the final regs clarify that a taxpayer may use any reasonable method for determining the unadjusted depreciable basis of the disposed portion of the asset only if it is impracticable from the taxpayer’s records to determine such unadjusted depreciable basis. If a taxpayer disposes of more than one portion of the same asset and it is impracticable from the taxpayer’s records to determine the unadjusted depreciable basis of the first disposed portion of the asset, the reasonable method used by the taxpayer must be consistently applied to all portions of the same asset for purposes of determining the unadjusted depreciable basis of each disposed portion of the asset. If the asset, a portion of which is disposed of, is in a multiple asset account, the reasonable method used by the taxpayer must be consistently applied to all assets and portions of assets in the same multiple asset account. (Reg. § 1.168(i)-1(j)(3), Reg. § 1.168(i)-8(f)(2), Reg. § 1.168(i)-8(f)(3))

Effective dates. The final regs apply to tax years beginning on or after Jan. 1, 2014. Alternatively, a taxpayer may choose to apply the final regs to tax years beginning on or after Jan. 1, 2012. (Reg. § 1.168(i)-1(m), Reg. § 1.168(i)-7(e), Reg. § 1.168(i)-8(i) )

A taxpayer also may choose to rely on the provisions of the proposed regs for tax years beginning on or after Jan. 1, 2012, and beginning before Jan. 1, 2014. And, a taxpayer may choose to apply the temporary regs to tax years beginning on or after Jan. 1, 2012, and beginning before Jan. 1, 2014. (Reg. § 1.168(i)-1(m), Reg. § 1.168(i)-7(e), Reg. § 1.168(i)-8(i))

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Meet Paul Raymond

Meet Paul Raymond

Mr. Raymond is a sought after speaker in tax controversy law by many attorney, accountant, and business groups and at the request of the Internal Revenue Service, has presented programs at the IRS Nationwide Tax Forum, attended by tax professionals throughout the United States.

Additionally, he continues to be an active member in the Section of Taxation, American Bar Association, where he was the Past Chair of the Employment Taxes Committee.

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