On February 28, the IRS issued new guidance that allows taxpayers to claim a loss on structural components of buildings retired in prior years. Rev. Proc. 2014-17 provides updated automatic consent procedures for accounting method changes, which allows taxpayers to make a late partial disposition election accounting method change. The guidance also allows taxpayers to revoke any general asset account elections made under the temporary regulations. Rev. Proc. 2014-17 supersedes Rev. Proc. 2012-20.
In December 2011, the Treasury Department issued comprehensive temporary regulations pertaining to the acquisition and disposition of tangible personal property ("the 2011 temporary regulations"). In March 2012, the IRS issued two revenue procedures to provide implementation guidance for automatic accounting method changes permitted under the temporary regulations:
- Rev. Proc. 2012-19 relating to the acquisition and capitalization of tangible property, and
- Rev. Proc. 2012-20 relating to the disposition of tangible property.
In September 2013, the Treasury Department issued final regulations relating to the acquisition and capitalization of tangible property, and new proposed regulations relating to the disposition of tangible property (see our Federal Tax Alert, Updated Tangible Property Rules Expand Safe Harbors, Disposition Rules). With respect to the disposition of tangible property, taxpayers may apply the new proposed regulations or the 2011 temporary regulations (or neither) to tax years beginning on or after January 1, 2012, and before January 1, 2014. Final regulations pertaining to the disposition of tangible property are expected to be issued later in 2014 and will be required for tax years beginning on or after January 1, 2014.
Partial Dispositions of Tangible Property
One of the more significant changes between the 2011 temporary regulations and the 2013 proposed regulations involved dispositions of tangible property. Under the 2011 temporary regulations, a taxpayer was required to treat the retirement of a structural component of a building (e.g., a roof) as a disposition, thus enabling the taxpayer to claim a loss on the remaining cost basis of that component. Under Rev. Proc. 2012-20, the taxpayer could request an automatic accounting method change to take a partial disposition loss on assets disposed of in a prior year.
Under the 2013 proposed regulations, a structural component of a building is no longer a separate asset for disposition purposes; instead, the entire building is the asset. Taxpayers can make a partial disposition election, however, to claim a loss on the remaining cost basis of a retired component. The proposed regulations also expand the partial disposition rules to apply to significant components of tangible personal property (e.g., an airplane engine) as well as to structural components of buildings.
The change in the Treasury's approach to partial dispositions, from an accounting method to an annual election, raised many questions as to how, or even if, a taxpayer could claim a loss on a partial disposition in a prior year under the 2013 proposed regulations. Rev. Proc. 2014-17 answers these questions by allowing taxpayers to request an automatic accounting method change to make a late partial disposition election on property retired in any tax year prior to the year for which the change is filed. Additionally, Rev. Proc. 2014-17 permits the use of statistical sampling to assist taxpayers with identifying particular assets retired in prior years (particularly those for which the retirement occurred many years ago). The taxpayer cannot make a late partial disposition election if it no longer owned the underlying, larger asset as of the beginning of the year of change. For example, you cannot make a late partial disposition election on a replaced roof if you no longer own the building.
The late partial disposition election accounting method change is only available for tax years beginning on or after January 1, 2012, and beginning before January 1, 2014. The IRS is considering, however, whether to extend the ability to make that change to 2014 when they issue the final guidance later this year. Taxpayers who claimed a partial disposition loss under the 2011 temporary regulations will need to conform to the 2013 proposed regulations by making a late partial disposition election accounting method change.
General Asset Accounts
Taxpayers have long had the ability to make general asset account ("GAA") elections to group together similar assets placed in service in the same year and treat them as one asset for depreciation and disposition purposes. Traditionally, GAA elections have been relatively rare for small and medium-sized businesses since they typically keep a taxpayer from realizing losses on dispositions of assets in a GAA on a timely basis. Instead, the GAA continues to be depreciated until the balance is zero or all assets in the GAA are disposed of.
The 2011 temporary regulations made a significant change to the GAA rules by allowing taxpayers to elect to recognize gain or loss on the qualifying disposition of an asset within the GAA. With this impediment removed, many taxpayers made the accounting method change to retroactively place assets (e.g., buildings) in GAAs to give the taxpayers maximum flexibility in determining whether the replacement of a component of a building constituted a repair or a disposal whereby a loss would be recognized.
The 2013 proposed regulations abruptly changed course and eliminated the qualifying disposition election on assets within a GAA (replacing the concept with the partial asset disposition election). Many taxpayers that had made the late GAA elections under the 2011 temporary regulations suddenly wished they hadn't.
Rev. Proc. 2014-17 provides those taxpayers relief by allowing them to file an automatic accounting method change to revoke any late GAA elections made under Rev. Proc. 2012-20 or any GAA elections made for the 2012 or 2013 tax years. The accounting method change to revoke a GAA election is only available for tax years beginning on or after January 1, 2012, and beginning before January 1, 2015.
If you previously replaced a significant component of a building, such as a roof, you may be able to accelerate deductions on your 2013 tax return by making the late partial disposition election accounting method change. If you made a late GAA election on a prior year return to take advantage of the 2011 temporary regulations, you can undo that election in light of the 2013 proposed regulations. Contact your local CBIZ Tofias tax advisor to discuss your situation, or you may contact us here.