Not too late for your existing dispositions…
As another ‘busy-season’ comes to a close and extensions have been filed, there is still a small window in which you can scrub your fixed asset system for existing partial asset dispositions. These are duplicate assets that are being depreciated simultaneously for which the initial entries can now be written off. This provides an immediate deduction as well as cleans-up the fixed asset record.
Impact of the repair regulations
On September 13, 2013, the Treasury published final regulations (the repair regulations) that expanded and clarified the rules surrounding capital expenditures. These regulations took effect January 1, 2014. These new rules:
- refined the definition of “unit of property,” establishing a facts-based approach to determining whether work performed on a building or leasehold improvements should be considered a deductible repair or a capital expense
- allowed the routine maintenance safe harbor to now apply to buildings (the final regulations use 10 years as the time period in which a taxpayer must reasonably expect to perform the relevant activities more than once)
With the finalization of the repair regulations, a framework is now established for how the depreciation records of a building should be structured for federal tax fixed asset depreciation purposes. Combined with an understanding of Section 168 dispositions, these two parts are needed to properly set up and maintain real property depreciation records for both capital expenses and deductions for federal tax purposes.
Modified Accelerated Cost Recovery System (MACRS)
The Treasury also issued final regulations on the disposition of Modified Accelerated Cost Recovery System (MACRS) property, effective August 14, 2014. This was the last major component of the IRS’s long-running effort to provide updated regulatory guidance on the capitalization, depreciation and disposition of tangible personal property.
These “disposition” regulations provide rules for:
- determining gain or loss upon the disposition of depreciable property
- determining the asset disposed of
- accounting for partial dispositions.
They took effect August 18, 2014, and apply to tax years beginning on or after January 1, 2014.
Engineering-based cost segregation studies
An engineering-based cost segregation study is traditionally used to reclassify federal tax depreciation rates of real property from one lump-sum asset listed in a fixed asset system as a “building” with a recovery period of 39 years, to multiple detailed entries that identify separate assets with shorter recovery periods, such as 5, 7 or 15 years.
However, under the final regulations, a building and its structural components are considered a single unit of property. The qualitative and quantitative information already contained in an engineering-based study can now be used to readily identify all of these assets. This is reflected in asset breakouts that show a specific quantity of each particular asset, for example:
- x amount of rooftop units
- x amount of windows
- x amount of electrical connections
- and so on
You can determine the basis of an asset in a general asset account or an asset that is partly disposed of using any reasonable method, but only if it is impractical to make the determination from your records. The final regulations do not include discounting the cost of the replacement asset by the Consumer Price Index as an example of a reasonable method. Instead, the Producer Price Index for Finished Goods/Final Demand may be used, more accurately reflecting inflation for capital expenditures.
Your stumbling block may be in correctly identifying a reasonable method and then implementing it. To do this successfully, incorporate the estimating techniques utilized in cost segregation studies to detail specific estimates for each of the applicable assets. Identifying those assets correctly allows you to properly calculate your dispositions of real property.