Transcript De minimis - TPR Tips and Tools

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Capitalization of
Tangible Assets
Understanding the New IRS
Regulations and What [client
name] needs to do in Response
Presented by
xxxxxxx CPAs and Consultants
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xxxxxxxxxx, CPA and
xxxxxxx, CPA
Month Day, 2014
Meeting’s Discussion Topics
Materials and supplies—definitions of materials and supplies
Discussion of the new de minimis safe harbor rules and
annual elections
Repairs—deductions for amounts paid to repair and maintain
property not required to be capitalized under 263(a)
The expenditures required to be capitalized
 Betterments, Restorations, New Use
Building or component dispositions
Introduction on how to change accounting methods
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Today’s Learning Objectives
Understand the tangible property regulations (TPRs) that the
IRS has changed related to:
 Write offs:
 Repairs and maintenance
 Materials and supplies
 Capitalization Issues:
 Improvements to property verses R & M
 Acquisitions
What you need to follow up on (changes in accounting
methods related to these regulations)
What is the impact of these TPRs to you (both tax and
financial statement)
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10,000-Feet TPR Observations
Few objective rules
What you have done to date (asset groupings, cost
segregation, depreciation choices) matter
Cost segregation still relevant and needed
Multiple Code Sections changed, not just 263(a)
[capitalization], but also Sections 162 [ordinary and
necessary business expenses], 168 [depreciation]
Every taxpayer (TP) is affected, just about every TP will
have to file several 3115s (potentially 4 to 5 IRS form for
Change in Accounting Method, Form #3115)
We will need a lot of old facts/data from you
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Depreciation Allowable or Taken –
this issue is “huge”.
Points: (1) Suggest that you use the spring
and summer of 2014 to correct any errors in
prior year depreciation, and note that
(2) section 1.1016-3 is part of the TPRs for a
reason – that is the “scary” part – the IRS will
use this in their future audits of TPs to deny
depreciation deductions or items that could
have been written off as R & M in prior years
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§1.1016-3 Exhaustion, Wear and Tear, Obsolescence, Amortization, and
Depletion
Determination of the amount properly allowable for exhaustion,
wear and tear, obsolescence, amortization, and depletion must
be made on the basis of facts reasonably known to exist at the
end of the taxable year.
A TP is not permitted to take advantage in a later year of the
TP's prior failure to take any such allowance or the TP's taking an
allowance plainly inadequate under the known facts in prior
years.
Caution: In the case of depr., if in prior years the TP has
consistently taken proper deductions under one method, the
amount allowable for such prior years must not be increased
even though a greater amount would have been allowable under
another proper method.
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Warnings for Taxpayers (TP)…if
(1) a TP does not identify all of the tangible property
issue(s),
(2) a TP does not implement the rules correctly, AND
(3) file all of the necessary 3115s under the correct new
method(s),
the TPs could have certain current and future tax
depreciation denied and/or miss the potential write-off on
previously capitalized assets.
This exposure is greatest for errors asset class lives, in bonus
depreciation, and for building issues, since that is where the
greatest dollar amounts exist.
Your exposure for errors is great and the time to execute is
limited.
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“Errors” (are impermissible methods) in
Depreciation Deductions
Must correct most issues/impermissible
methods (class life or bonus errors) by filing a
3115.
Unless the issues/methods were done only in
the prior tax years, the TP is not permitted to
make these corrections with an amended
return
Cannot fix depreciation errors by “catching
up” on prior year errors
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What TPs Need to Do
Depreciation Schedules: fix them before the IRS disallows
“missed” depreciation
 Fix based upon the new TPR capitalization criteria – not why it was
done when it was added to the depreciation schedule
Assess conformity of your current policies and procedures
with these TPRs
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Capitalization policies verses R & M
Minimum capitalization thresholds ($500, $1,000, more?)
Routine maintenance expenditures
Internal tracking and capturing data
Do Your Current method(s) conform to TPRs?
 Unless you just went into business, there is no way they can, so we
need to file 3115s
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Depreciation Error Process
1. Find out what ‘activity’ the business is in by
reviewing Rev. Proc. 87-56
a) This will instruct us what the asset guideline class
lives should be, O/T asset classes 00.11 to 00.4. 00.11
to 00.4 are the “common” class lives.
b) Based on the business’ “activity” we may have class
lives that are different from the common class lives.
c) 00.11 to 00.4 state the following: office equipment is
7 years; computers =5, copiers=5, cars and trucks=5,
land improvements=15
d) But if an activity such as 33.3, land improvements are
7 years; if 57.0 (distributive trades and services)
equipment assets are 5 years, unless they fit into
00.11 to 00.4.
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What After Depreciation Errors?
2.There are other issues that are not depreciation
errors, but rather are TPR issues that are generated
from a review of the depreciation schedules. There
are:
a) Repair items that were capitalized. (items that were
capitalized but viewed now under the TPRs would
have been written off).
b) Prior building write off issues. (new roof was added
but old roof can now be written off
a)
This can be done even if the old roof comes from many years
ago (example: old roof was put on in 1995 – there is still
many years of depreciation remaining that can be written off
as the asset was put on with a 39 year life)
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What you need to address first on most of the TPR Issues
(after addressing
depreciation error corrections):
- two items –
TPR Issue(s) identification
Unit of Property
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Issue(s) Identification – “the list”
The actions a TP may need to take under these TRs are
not limited to:
 Statement to the IRS about, and/or Change in your “unit of
property”: What do you want your unit of property to be? Do
you have buildings grouped together in the depreciation
schedule? (example: multiple buildings in an apartment
building)[more on this in a few slides…]
 The need to breakout prior costs for property capitalized
(i.e. what is the detail in that 39 year asset account where
the roof was replaced years ago?)
 Write off or capitalize current year expenditures (and if we
capitalize, do we have prior to dispose of?
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Issue(s) Identification - 2
If we have to write off prior assets, do they still have
basis that can be written off?
 If fully depreciated, unless we also want to write off the
removal costs of the new asset, we are done with this asset.
Just capitalize the current expenditures and depreciate
them properly over future years
If we have to write off these prior assets (or removal
costs) and they still have basis, we have to determine
whether we are going to write those assets off in a 3115
filing under the “cost known” method (such as a cost
segregation or being able to recreate the original costs)
or under a “reasonable allocation” method (such as a
PPI “lookback”)
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Issue(s) Identification - 3
Do we need to correct depreciation errors (i.e.
bonus, lives)? Every depreciation schedule will
need to be “scrubbed” for errors. These will
require 3115 filings in order to take the (typical)
negative 481(a) adjustments. We have decided, in
general, that this is fall/winter work for 2014 and that these changes must be done and attached
to the 2013 income tax returns.
Adopt new accounting method(s) – (numerous
potential methods!!!)
File 3115(s) (separately or together) for what?
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Unit of Property (UoP)
Is a very important element to these
and other regulations
Do You first need to change any UoP
before you makes a method change
under the new TPRs?
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Unit of Property (UoP)
UoP is a very important issue, why?:
 It is an important criteria in the decision whether a TP
can write off an expenditure
Generally:
 The smaller the UoP the more likely the expenditure
will be required to be capitalized
This issue should almost always be considered in
TPR issues, most of the time, early, and affirmative
statements made to the IRS on what you want the
UoP to be.
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Building UoP Examples
Apartment complex with multiple buildings –
all listed as one asset on the depreciation
schedule:
 UoP must be changed to each building (but
capitalization considerations on building
components and/or system are measured in
comparison to that building component that
performs a unique function or specifically
enumerated system)
Retailer complex with multiple buildings:
 UoP is each individual separate building
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Review of the TPR
Main Standards
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What the Tangible Property
Regulations (TPR) Do
TPRs provide guidance on the application of Sections 162(a) (deduction)
and 263(a) (requires capitalization) of the Code to amounts paid to
acquire, produce, or improve tangible property.
 Regulations aim to clarify the difference between these two opposites
Final regulations were issued in September of 2013 and only give us
through tax year 2014 in which to make these new method changes and
potential numerous annual elections
Clarify and expand the standards under Sections 162(a) and 263(a)
Provide certain bright-line tests (for example, new de minimis safe
harbor rules for certain acquisitions)
Provide guidance under Section 168 regarding the accounting for, and
dispositions of, building property
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What the ‘Repair’
Regulations Do
TR will affect all taxpayers that acquire,
produce, or improve tangible property
Regulations are effective on January 1, 2014
or for taxable years that begin after 1-12014, but can be applied for tax years 2012
to 2013 (so why not apply the “beneficial”
method changes earlier and get a nice tax
deduction?)
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What the ‘Repair’
Regulations Do
Splits the definition of tangible property into
two categories:
 Buildings
 Everything else
For Buildings: a building and its structural
components are treated as a single unit of
property, but when improving “building
systems,” must be separated out
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Building and Structural Components
1.263(a)-3(e)(2) (UoP)
General rule that the UoP for a building is comprised of the
building and its structural components
Requires that a TP apply the improvement standards separately
to the primary components of the building, that is, the building
structure or any of the specifically defined building systems.
A cost is treated as a capital expenditure if it results in an
improvement to the building structure or to any of the
specifically enumerated building systems.
Defines the building structure as the building (§1.48-1(e)(1)) and
its structural components (§1.48-1(e)(2)) other than the
components specifically enumerated as building systems.
A UoP is a method of accounting
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Building and Structural Components
1.263(a)-3(e)(2) (UoP)
Defines building systems to include (1) the heating,
ventilation, and air conditioning systems (“HVAC”);
(2) the plumbing systems; (3) the electrical systems;
(4) all escalators; (5) all elevators; (6) the fire
protection and alarm systems; (7) the security
systems; (8) the gas distribution systems; and (9) any
other systems identified in published guidance
These are considered improvements to the building:
Replacement of an entire roof, improvement to the
HVAC system
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Building and Structural Components
1.263(a)-3(e)(2) (UoP)
Old Rule: Taxpayer was required to depreciate
building improvements over the life of the original
asset (39 years), even if building had been 29 years
into its depreciable life; no write off of the replaced
component
 If one replaced a roof, for example, you depreciated two
roofs—the original one and the replaced one, or three roofs,
etc.
New Rule: replace a roof, you are able to recover as
a loss the remaining basis of the old roof, book the
new roof and depreciate it
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Background
Section 263(a) (relating to the capitalization
requirement) states that no deduction is
allowed for:
(1) Any amount paid out for new buildings or
permanent improvements or betterments made to
increase the value of any property, or
(2) Any amount expended in restoring property or in
making good the exhaustion thereof for which an
allowance has been made.
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Background
263(a) Regulations state that capital expenditures
include amounts paid or incurred to:
 Add to the value, or substantially prolong the useful life, of
property owned by the TP; or,
 Adapt the property to a new or different use.
 Amounts paid or incurred for incidental repairs and
maintenance of property (as defined by 162 and §1.162-4
(relating to the deduction for ordinary and necessary trade
or business expenses) are not capital expenditures under
§1.263(a)-1.
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U.S. Courts on
Capitalization Have
Recognized the highly factual nature of determining whether
expenditures are for capital improvements or for repairs
Articulated a number of ways to distinguish between deductible
repairs and non-deductible capital improvements.
Explained that R and M expenses are incurred for the purpose of
keeping property in an ordinarily efficient operating condition
over its probable useful life for the uses for which the property
was acquired.
Explained that capital expenditures, in contrast, are for
replacements, alterations, improvements, or additions that
appreciably prolong the life of the property, materially increase
its value, or make it adaptable to a different use
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U.S. Courts on
Capitalization Have
Explained that the relevant distinction between capital
improvements and repairs is whether the expenditures were
made to “put” or “keep” property in efficient operating
condition
Stated that if the expenditure merely restores the property to
the state it was in before the situation prompting the
expenditure arose and does not make the property more
valuable, more useful, or longer-lived, then such an expenditure
is usually considered a deductible repair.
Concluded that a capital expenditure is generally considered to
be a more permanent increment in the longevity, utility, or
worth of the property.
Key is that TR have attempted to match or meet these
“elements” outlined in those court cases ….
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TPR Regulations
Do Not Change
§263(a), which requires TPs to capitalize amounts
paid to improve tangible property and
§263A and the regulations under §263A, which require
TPs to capitalize the direct and allocable indirect
costs, including the cost of materials and supplies, to
property produced or to property acquired for resale
§1.471-1, which requires TPs to include in inventory
certain materials and supplies
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TPR Regulations
Do Adopt and Refine
1.
The definition and treatment of materials and supplies
2.
New de minimis safe harbor rules for the acquisition and production of
property and/or material & supplies
3.
An election to capitalize materials and supplies and/or R & M
4.
Safe harbor for routine maintenance for both tangible personal property
and buildings
5.
Rules for determining a unit of property
6.
Certain rule revisions for determining whether there has been an
improvement to a unit of property
7.
Rules revisions for determining whether an amount is paid for an
improvement to a building.
8.
Rule revisions for determining whether an amount is paid for the
replacement of a major component or substantial structural part of a
unit of property
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TPR Regulations
Do Adopt and Refine
9. Expanded definition of disposition for MACRS to include the
retirement of a structural component (loss recognition availability
for partial building disposals)
10. The general rule that incidental materials and supplies (for which
no inventories or records of consumption are maintained) are
deductible in the year purchased
11. Statements that non-incidental materials and supplies are not
deductible until the year in which they are used or consumed in the
TP's operations, unless the new safe harbor de minimis is applied)
12. New rules for rotable and temporary spare parts
13. No longer a need for TPs to understand General Asset Groupings
14. Numerous new and revised examples
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Material and Supplies
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Definition of
Material and Supplies
TPRs define and expand the definition of materials and supplies as
tangible property that is used or consumed in the TP’s operations,
not constituting a UoP, not acquired as part of a single UoP, and is
not inventory, and that:
1.
Is a component acquired to maintain, repair, or improve a unit of tangible
property owned, leased, or serviced by the TP and that is not acquired as
part of any single unit of tangible property;
2.
Consists of fuel, lubricants, water, and similar items, that are reasonably
expected to be consumed in 12 months or less, beginning when used in
TP's operations; (New Category)
3.
Is a UoP that has an economic useful life of 12 months or less, beginning
when the property is used or consumed in the TP's operations;
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Definition of
Material and Supplies
4. Is a UoP that has an acquisition cost or production cost (under
Section 263A ) of $200 or less (or other amount as identified in
published guidance in the Federal Register or in the IRB; or
5. Is identified in published guidance in the Federal Register or in the
IRB as materials and supplies for which treatment is permitted
6. Also provide an election to treat certain materials and supplies
under the de minimis safe harbor rule
7. Allow a TP to elect to capitalize certain materials and supplies.
8. Redefine the first category of materials and supplies by further
describing the types of components that qualify and by
9. Eliminating the prior discussion that such property not be a UoP
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Definition of
Material and Supplies
Specified acquisition or production cost threshold
 Final TPRs up the limitation to $200 per item
 Add language, however, that gives the IRS and the Treasury
Department the flexibility to change the amount of the
limitation
 A TPR with either applicable financial statements (AFS) or at
least a written communicated policy will be permitted to
deduct amounts paid for property up to $5,000 and $500
respectively if it complies with the new method change
requirements and elects annually to write off on books and
tax these amounts.
Adds a new definition for “standby emergency spare parts”
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Election to Capitalize
Material and Supplies
A TP may elect to treat as a capital expenditure and to treat as
an asset, subject to depreciation, the cost of any M and S
Election applies to amounts paid during the taxable year to
acquire or produce any M or S. Any asset for which this election
is made shall not be treated as a M or S.
Exceptions. A TP may not elect to capitalize
i. Any amount paid to acquire or produce a M or S if:
ii. The M or S is intended to be used as a component of a unit of property
and
iii. The TP has not elected to capitalize and depreciate that unit of
property; or
ii. Any amount paid to acquire or produce a rotable or temporary spare
part if the TP has applied its optional method of accounting
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Election to Capitalize
Material and Supplies
A TP makes the election by capitalizing the
amounts in the taxable year the amounts are
paid and by beginning to depreciate them
If a pass-through entity, the election is made
at the entity level
A TP must apply the de minimis safe harbor to
amounts paid for all M & S, except for those M & S
that the TP elects to capitalize and depreciate
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De minimis
Safe Harbor (DMSH)
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DMSH
 Final - (can apply to 2012 and 2013 but must apply 2014
and after) de minimis safe harbor:
 There is no ceiling as to the amount that can be
deducted if it fits in the DMSH amounts
 Must make an annual election on the tax return
 Safe harbor determined at invoice item level, but same
on policies for books and records
 If you have an audit, TP may rely on DMSH only if the
amount paid for property does not exceed $5,000 per
invoice, or per item as substantiated by the invoice.
 If no audited financials, generally DMSH is $500 per
invoice/items
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DMSH
The de minimis safe harbor has been expanded to include
amounts paid for property having an economic useful life
of less than 12 months.
A $500 per item de minimis rule is also included for
taxpayers without an AFS, but still have to have
accounting procedures in place to deduct amounts paid for
property costing less than a specified amount, or amounts
paid for property with a life of 12 months or less
If cost exceeds $500 per invoice, no portion will qualify for
the safe harbor
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DMSH
The de minimis safe harbor does not preclude a TP from
reaching an agreement with the IRS that the IRS
examining agents will not review certain items.
Examining agents do not need to revise their materiality
thresholds in accordance with the safe harbor
limitations.
The DMSH is elected annually by including a statement
on the TP's tax return for the year elected.
An election to use the safe harbor may not be made
through the filing of an application for change in
accounting method, it must be made on the return when
filed
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DMSH
If an invoice includes amounts paid for multiple tangible
properties and the invoice includes additional invoice
costs related to the multiple properties, then the
taxpayer must allocate the additional invoice costs to
each property using a reasonable method
The DMSH must be applied to all eligible M & S (other
than rotable, temporary, and standby emergency spare
parts subject to the election to capitalize or to rotable
and temporary spare parts subject to the optional
method of accounting for such parts) if the TP elects the
DMSH
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DMSH
TPs that do not elect the de minimis safe harbor must
treat amounts paid for materials and supplies in
accordance with Reg. §1.162-3.
TPs subject to 263A can not avoid those provisions by
using the DMSH
Safe harbor does not apply to inventory, land, items it
capitalizes, and the optional method of rotable parts
Safe harbor is deducted as ordinary and necessary
expense
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De minimis Rule
Election Details
… of the de minimis safe harbor election:
Note that the TPRs do not state that the
“election” of the safe harbor de minimis rule
is a method of accounting
That means that a TP can elect to apply the
de minimis rule in one year and not the next
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Applicable Financial Statements
Defined as: TP’s FS that has the highest priority.
The FS are, in descending priority:
A. A FS required to be filed with the SEC;
B. A certified audited FS that is accompanied by the report of
an independent CPA, that is used for:
1) Credit purposes;
2) Reporting to shareholders, partners, or similar persons; or
3) Any other substantial non-tax purpose; or
C. A FS (other than a tax return) required to be provided to the
federal or a state government or any federal or state
agencies (other than the SEC or the Internal Revenue
Service).
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Improvements
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Amounts Paid to Improve Tangible Property Reg. §1.263(a)-3(d)
Requirement to capitalize amounts paid for
improvements
A TP generally must capitalize the related amounts paid
to improve a unit of property owned by the TP.
For purposes of this section, a unit of property is
improved if the amounts paid for activities performed
after the property is placed in service by the TP--
(1) Are for a betterment to the unit of property
(2) Restore the unit of property or
(3) Adapt the unit of property to a new or different use
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Special rules for determining improvement
costs— Reg. §1.263(a)-3(g)
Removal Costs—
If a TP disposes of a depreciable asset, including
a partial disposition under Prop. Reg. §1.168(i)1(e)(2)(ix), and has taken into account the
adjusted basis of the asset or component of the
asset in realizing gain or loss, then the costs of
removing the asset or component are not
required to be capitalized
If the taxpayer wants to deduct removal costs, it
must file a new 3115 for this method
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Special rules for determining improvement
costs— Reg. §1.263(a)-3(g)
Removal Costs—
If a TP disposes of a component of a unit of
property, but the disposal of the component is not
a disposition, then the TP must deduct or
capitalize the costs of removing the component
based on whether the removal costs directly
benefit or are incurred by reason of a repair to
the unit of property or an improvement to the
unit of property.
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New Building Safe
Harbor for Small
Taxpayers
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Safe harbor for small taxpayers— Reg.
§1.263(a)-3(h) (SHST)
Certain TPs may elect to not apply the capitalization
requirements to an eligible building property if the total
amount paid during the taxable year for repairs,
maintenance, improvements, and similar activities
performed on the eligible building property does not
exceed the lesser of—
(i) 2 percent of the unadjusted basis (as defined under
paragraph (h)(5) of this section) of the eligible building
property; or
(ii) $10,000.
“amount paid” do not include items capitalized under de
minimis safe harbor or those amounts deemed not to
improve under the safe harbor for routine maintenance
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SHST
Qualifying taxpayer—
(i) In general - the term qualifying TP means a
TP whose average annual gross receipts for the
three preceding taxable years is less than or
equal to $10,000,000.
 Rules for TPs in existence for less than 3
years
 Short year – annualize
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Safe Harbor for
Routine Maintenance
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Safe harbor for routine maintenance- Reg.
§1.263(a)-3(i) (slide 1)
An amount paid for routine maintenance on a unit of
tangible property, or in the case of a building, on any of
the properties is deemed not to improve that unit of
property.
Routine maintenance for a building is the recurring
activities that a TP expects to perform as a result of the
use to keep the building structure/system in its
ordinarily efficient operating condition. Routine
maintenance activities include, the inspection, cleaning,
and testing of the building structure or each building
system, and the replacement of damaged or worn parts
with comparable and commercially available
replacement parts. Routine maintenance may be
performed any time during the useful life of the building
structure or building systems.
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Safe harbor for routine maintenance- Reg.
§1.263(a)-3(i) (slide 2)
The activities are routine only if the TP reasonably
expects to perform the activities more than once during
the 10-year period beginning when placed in service
Factors to be considered in determining whether
maintenance is routine and whether a taxpayer’s
expectation is reasonable include the recurring nature
of the activity, industry practice, manufacturers’
recommendations, and the taxpayer’s experience with
similar or identical property. With respect to a taxpayer
that is a lessor of a building or a part of the building,
the taxpayer’s use of the building unit of property
includes the lessee’s use of its unit of property.
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Betterments
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Capitalization of betterments - Reg.
§1.263(a)-3(j) (slide 1)
An amount is paid for a betterment to a unit of property
only if it--
 Ameliorates a material condition or defect that
either existed prior
 Is for a material addition, including a physical
enlargement, expansion, extension, or addition of a
major component to the unit of property or a
material increase in the capacity
 Is reasonably expected to materially increase the
productivity, efficiency, strength, quality, or output
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Betterment Criteria
Application of betterment rules:
The applicability of each quantitative and qualitative
factors depends on the nature of the unit of property.
For example, if an addition or an increase in a particular
factor cannot be measured in the context of a specific
type of property, that factor is not relevant in the
determination
An amount is paid to improve a building if it is paid for
an increase in the efficiency of the building structure or
any one of its building systems (for example, the HVAC
system).
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Betterments - Comparison
Appropriate comparison - In cases in which an
expenditure is necessitated by normal wear and tear or
damage to the unit of property that occurred during the
TP’s use of the unit of property, the determination of
whether an expenditure is for the betterment of the unit
of property is made by comparing the condition of the
property immediately after the expenditure with the
condition of the property immediately prior to the
circumstances necessitating the expenditure.
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Restorations
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Restorations 1.263(a)-3(k)
An amount is paid to restore, and therefore
improve, a UoP if it:
1. It returns the UoP to its ordinarily efficient operating
condition if the property has deteriorated to a state of
disrepair and was no longer functional for its intended use;
2. It is rebuilding to like-new condition: results in the
rebuilding of the UoP to a like-new condition after the end of
its class life (brought to the status of new, rebuilt,
remanufactured, or similar status under the terms of any
federal regulatory guideline or the manufacturer’s original
specifications); or
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Restorations
 Returns the unit of property to its ordinarily
efficient operating condition if the property
has deteriorated to a state of disrepair and is
no longer functional for its intended use;
 rebuilding of the unit of property to a likenew condition after the end of its class life
 Is for the replacement of a part or a
combination of parts that comprise a major
component or a substantial structural part of
a unit of property
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Written Off Examples
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Capitalized Examples
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Amounts to Adapt Property to a New or
Different Use 1.263(a)-3(l)
TP must capitalize amounts paid to adapt a unit of
property to a new or different use.
Amount is paid to adapt a unit of property to a new or
different use if the adaptation is not consistent with the
TP’s intended ordinary use of the unit of property at the
time originally placed in service by the TP.
In the case of a building, an amount is paid to adapt the
UoP to a new or different use if it adapts to a new or
different use any of the properties designated in
paragraphs (e)(2)(ii)(building structure and systems),
(e)(2)(iii)(B)(condominium), (e)(2)(iv)(B)(cooperative), or
(e)(2)(v)(B) (leased building) of this section.
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Accounting Method Change
Rules
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Accounting Method Changes for Reg. §1.263(a)-3
Other than the new annual elections (such as for DMSH or
SHST) taxpayers must file IRS form 3115 to comply with these
new choices.
The new regulations generally require a change in method of
accounting to which the provisions of sections 446 and 481
and the accompanying regulations apply.
Changes generally apply to taxable years on or after 1-1-14,
except for (h) the safe harbor for small taxpayers, (m) the
optional regulatory method, and (n) the election to capitalize
R & M apply to amounts paid on or after 1-1-14
A TP may choose to apply DMSH and/or SHST to amounts paid
in taxable years beginning on or after January 1, 2012.
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Disposition Rules
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Disposition Rules for MACRS
Structural Components.
This rule change allows TPs to chose to take or forgo a
loss upon the disposition of a structural component of
a building without making a general asset account
(GAA) election as required under the temporary
regulations.
A TP desiring to claim a loss on a retired structural
component outside of a GAA is now required to make a
“partial disposition election” (this is a new term).
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Partial Dispositions - Assets Not
Included in GAAs
The PRs allow a TP to claim a loss upon the
disposition of a structural component (or a portion
thereof) of a building of any other asset (a "partial
disposition" of an asset) without identifying the
component as an asset before the disposition event by
making a partial disposition election.
While the partial disposition rule is generally elective,
the rule is required to be applied to:
 Disposition due to casualty event
 Disposition of a portion of an asset for which gain is not
recognized in whole or part under 1031 or 1033
 Sale or transfer of a portion of an asset
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MACRS
Definition of Disposition
Occurs when ownership of the asset is transferred; or,
Asset is permanently withdrawn from use either in the
taxpayer’s trade or business or in the production of income;
Includes the sale, exchange, retirement, physical
abandonment, or destruction of an asset;
Also includes the retirement of a structural component of a
building (defined by 1.48-1); and,
Finally, when an asset is transferred to a supplies, scrap, or
similar account.
Manner of Disposition—does not matter.
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Basis and Identification of Disposed or
Converted Asset
Where it is impracticable from the TP’s records
to determine the unadjusted depreciable basis
of the disposed-of asset, the TP may use any
reasonable method that is consistently applied
to the taxpayer’s general asset accounts,
multiple asset accounts, or larger assets.
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Basis and Identification of Disposed or
Converted Asset - Methods
The PRs provide some comprehensive examples of
reasonable methods, including:
(1) discounting the cost of the replacement asset to its
placed-in-service year cost using the PPI;
(2) a pro rata allocation of the unadjusted depreciable
basis based on the replacement cost of the disposed-of
asset and the replacement cost of all of the assets, as
applicable; and/or
(3) a study allocating the cost of the asset to its individual
components.
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CONCLUSION
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