In our continued effort to educate our clients on the many nuances of the IRS Final Repair Regulations, this post focuses on what we see as a taxpayer friendly aspect of the regulations – the Partial Asset Disposition Election.
The partial asset disposition election, simply explained, allows a taxpayer the ability to dispose of part of an asset. More specifically, this election allows taxpayers to claim a loss on the disposition of a structural component (or a portion of a structural component) of a building, or a component (or a portion thereof) of any other asset.
So, what does this mean, and how can your company benefit from this new rule? The best way to explain this is by contrasting the partial disposition election to the prior rules.
Prior to the final repair regulations:
- Companies could NOT take a loss for a retired component of a building or other asset.
- SO, the new component would be capitalized and depreciated.
- AND, the retired component would also continue to be depreciated.
- For a large replacement, the tax deduction for the retired component (which the company is clearly not using or benefiting from any longer) would be spread out over the remaining tax life of the asset INSTEAD of getting an immediate deduction.
Now, under the final repair regulations, companies are able to claim an IMMEDIATE loss for the retired component which gives them an immediate tax deduction.
The best way to show the benefit is through an example:
As part of a building improvement, a company replaces the entire roof. The original roof cost $100,000 and was part of the original building placed in service 10 years ago. The original building and roof are being depreciated over 39 years.
Under the old rules, the original roof, even though no longer of benefit to the company, would continue to be depreciated for the remaining life of the building. This would spread the deduction over 29 years. That’s over $74,000 in potential deductions left on the table to be spread out over time.
Now, under the partial disposition rules, the company can take an immediate deduction for the old roof accelerating the $74,000 into the current year. That’s a HUGE tax benefit.
We have found that the partial disposition can be a very powerful tax savings tool not only for current and future years, but also for past years. Recently released IRS guidance now allows taxpayers to claim losses for prior year partial asset dispositions on their 2014 tax return. With a properly extended 2014 tax return, this gives taxpayers until September 15, 2015 to claim prior year losses for partial asset dispositions.
To prove the power of this opportunity, we will highlight a recent repair regulation study for one of our clients. We focused in part on prior year partial asset dispositions. The study resulted in an immediate tax deduction of over $700,000 for our client. Your company can take advantage of the same type of study if you act before September 15, 2015.
HOWEVER, once the 2014 extended deadline is past, taxpayers can no longer go back in time to benefit from this election to write-off assets that are still being depreciated despite the fact they were replaced in prior tax years. For 2015 and future tax returns, the partial asset disposition election will be available only in the year the asset is replaced.
The partial asset disposition election is a very POWERFUL tax savings tool. The IRS has provided taxpayers a narrow window to take advantage of this rule for prior years. The time to act to write-off prior year replaced assets is NOW. For future years, taxpayers will be limited to writing-off replaced assets that occurred in that year only. For more information on this topic, or to discuss a repair regulation study for your company, contact an Anders advisor today.
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