DISPOSITIONS OF TANGIBLE PROPERTY

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1 //////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// SPECIAL REPORT DISPOSITIONS OF TANGIBLE PROPERTY 0814-JO The Bureau of National Affairs, Inc.

2 The final regulations released on Thursday, August 14, represent the last major component of the IRS s long-running effort to provide updated regulatory guidance on the capitalization, depreciation, and disposition of tangible property. The final regulations provide rules for determining gain or loss upon the disposition of depreciable property, determining the asset disposed of, and accounting for partial dispositions. They also clarify the general asset account regulations and the regulations on accounting for depreciable property. The final regulations are effective on August 18, 2014, and apply to tax years beginning on or after January 1, It is helpful to put these final regulations in historical perspective because taxpayers may choose to apply one of three regimes for tax years beginning on or after January 1, 2012 and before January 1, In those years, taxpayers may apply (a) the 2014 final regulations, 4 (b) the 2013 proposed regulations, 5 or (c) the 2011 temporary regulations. 6 In 2011, the IRS published temporary 7 and proposed 8 regulations on the acquisition, production, and improvement of tangible property, as well as accounting for and disposing of depreciable property. The 2011 temporary regulations initially applied to taxable years beginning on or after January 1, 2012, but the applicability date was later changed to tax years beginning on or after January 1, Taxpayers could choose to apply the temporary regulations to taxable years beginning on or after January 1, 2012, and before the applicability date of the final regulations. 9 In 2013, the IRS removed the 2011 temporary regulations and finalized the rules on the acquisition, production, and improvement of tangible property. 10 At the same time, the IRS also withdrew the 2011 proposed regulations and published new proposed 1 T.D. 9689, 79 Fed. Reg. (8/18/14). 2 Preamble to T.D. 9689; Reg (i)-1(m), Reg (i)-7(e), Reg (i)-8(j). 3 Reg (i)-1(m), Reg (i)-7(e), Reg (i)-8(j). 4 T.D REG , 78 Fed. Reg (9/19/13). 6 T.D. 9564, 76 Fed. Reg (12/27/11). 7 T.D REG , 76 Fed. Reg (12/27/11). 9 Notice , I.R.B T.D. 9636, 78 Fed. Reg (9/19/2013).

3 regulations that provided rules on the disposition of depreciable property and amended the general asset account regulations and the depreciable property accounting regulations (2013 proposed regulations). 11 No comments were received in response to the 2013 proposed regulations, and the 2014 final regulations generally retain all of the proposed rules. The final regulations made two clarifications of the 2013 proposed rules: (1) how to determine the unadjusted depreciable basis of a disposed asset in a general or multiple asset account or a disposed portion of an asset, and (2) how to make certain elections on the disposition assets included in a general asset account when 280B (demolition of structures) applies. Determination of Basis of Disposed Asset The final regulations retain the 2013 proposed rules governing how to determine the unadjusted depreciable basis of an asset when it is disposed of, 12 including the rules that apply when the asset is in a multiple asset account, 13 and those applicable when only a portion of an asset is disposed of. 14 Both the final and 2013 proposed regulations provide that the basis of an asset in a general asset account, or an asset that is partly disposed of, may be determined using any reasonable method. However, the final regulations make two clarifications. First, the final regulations change the nonexclusive list of reasonable methods that may be used to determine the basis of an asset in a multiple asset account. 15 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 (and its successor, the Producer Price Index for Final Demand) may be used. These indices more accurately reflect inflation for capital expenditures. The final regulations also provide that discounting the cost of the replacement asset using the Producer Price Index for Finished Goods is a 11 REG Compare Reg (i)-8(f)(1) with Prop. Reg (i)-8(f)(1). 13 Compare Reg (i)-8(f)(2) with Prop. Reg (i)-8(f)(2). 14 Compare Reg (i)-8(f)(3) with Prop. Reg (i)-8(f)(3). See also Reg (i)-8(d)(1), Prop. Reg (i)- 8(e)(1) (partial disposition rule). 15 Compare Reg (i)-8(f)(2) with Prop. Reg (i)-8(f)(2).

4 reasonable method only if the replacement asset is a restoration under Reg (a)- 3(k) and is not a betterment under Reg (a)-3(j) or an adaptation to a new or different use under Reg (a)-3(l). Second, the final regulations clarify when a taxpayer may use a reasonable method to determine the basis of the disposed-of portion of an asset. 16 The IRS intended to allow taxpayers to use a reasonable method to compute the basis in a partial disposition only when it is impractical to use the taxpayer s records to do so. However, the 2013 proposed regulations did not reflect this intent. 17 Consequently, the final regulations clarify that a taxpayer may use any reasonable method for determining the basis of the disposed portion of an asset only if it is impractical to make the determination from the taxpayer s records. If a taxpayer disposes of more than one portion of the same asset, or the asset is in a multiple asset account, the same method used to calculate the basis of every asset or partial asset disposed of from that account. 18 Elections When 280B Applies to the Property The final and 2013 proposed regulations allow taxpayers to terminate general asset account treatment upon certain dispositions. A taxpayer may elect to recognize gain or loss for a general asset account when the taxpayer disposes of all of the assets, the last asset, or the remaining portion of the last asset in the account; 19 a taxpayer also may elect to terminate general asset account treatment for an asset in a general asset account when the taxpayer disposes of the asset in a qualifying disposition. 20 Generally, a taxpayer makes these elections by reporting the gain, loss, or other deduction on the taxpayer s timely filed original tax return for the tax year in which the disposition occurs Compare Reg (i)-8(f)(3) with Prop. Reg (i)-8(f)(3). 17 Preamble to T.D. 9689; Prop. Reg (i)-8(f)(3). 18 Reg (i)-8(f)(3). 19 Reg (i)-1(e)(3)(ii), Prop. Reg (i)-1(e)(3)(ii). 20 Reg (i)-1(e)(3)(iii), Prop. Reg (i)-1(e)(3)(iii). 21 Reg (i)-1(e)(3)(i), Prop. Reg (i)-1(e)(3)(i).

5 The final regulations clarify the method of making these elections when 280B applies. 22 A loss sustained when a structure to which 280B applies is demolished 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 taxable year in which the demolition occurs. 23 Accordingly, the final regulations clarify that a taxpayer makes the election to terminate the general asset account or the qualifying disposition election by ending depreciation for the demolished structure at the time of disposition and reporting the depreciation amount for the tax year in which the disposition occurs on the taxpayer s timely filed original federal tax return for that year. 24 Future Guidance The IRS has indicated that a revenue procedure will soon be released that provides guidance on the accounting method changes required to comply with these final regulations. It is anticipated that the guidance will echo that published in Rev. Proc following the release of the 2013 proposed regulations. 22 Reg (i)-1(e)(3)(i) B, Reg B-1. See also, Preamble to T.D Reg (i)-1(e)(3)(i) I.R.B. 661.

Guidance Regarding Dispositions of Tangible Depreciable Property. ACTION: Final regulations and removal of temporary regulations.

Guidance Regarding Dispositions of Tangible Depreciable Property. ACTION: Final regulations and removal of temporary regulations. This document is scheduled to be published in the Federal Register on 08/18/2014 and available online at http://federalregister.gov/a/2014-19403, and on FDsys.gov [4830-01-p] DEPARTMENT OF THE TREASURY