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Saturday, August 9, 2014

IRS Releases Final Rules for Tax Treatment of Dispositions of MACRS Property


On August 14, the IRS issued final regulations (“regs”) regarding the proper tax treatment of dispositions of tangible depreciable property under the Modified Accelerated Cost Recovery System (MACRS). The regs largely complete the IRS’s overhaul of the federal tax regs addressing the proper treatment of expenditures incurred in acquiring, producing or improving tangible assets. 

The final regs affect all taxpayers who dispose of MACRS property. The final regs generally follow the proposed regs that were issued in September 2013. The publication provides “rules for determining gain or loss upon the disposition of MACRS property1, determining the asset disposed of, and accounting for partial dispositions of MACRS property.” In coming days, the IRS is expected to update the revenue procedures (Rev. Proc. 2014-17) to provide further guidance for complying with the regulation. 

All taxpayers will be expected to comply with the final disposition regs beginning with their first tax year that begins on or after January 1, 2014. Before the final regs were published, temporary regs were given for tax years beginning on or after January 1, 2012. To help in the transition to the final regs, for a limited time taxpayers may choose to apply temporary regs. The ability to make the late election or partial disposition applies only to tax years ending between January 1, 2012 and December 31, 2013. 

The final regs retain the definition of a disposition as described in the proposed regs, including retirements of structural components and partial dispositions, or components of assets other than buildings. A partial disposition refers to the replacement of a structural component, such as a roof, with another component performing the same function. 

The partial disposition rule, generally, is elective. But it’s mandatory in certain circumstances, including for dispositions that result from a casualty event (e.g., a fire or storm) or a like-kind exchange. 

The final regs also include a special partial disposition rule for situations where the IRS disallows a taxpayer’s repair deduction for the amount paid or incurred for the replacement of a portion of an asset and requires capitalization of that amount. 

The partial disposition rule allows taxpayers to claim a loss on the disposition of a component (structural or otherwise) of an asset without having identified the component as an asset before the disposition. The rule reduces the number of cases where an original part and any subsequent replacements of that part must be capitalized and depreciated simultaneously. 

Generally, the specific facts and circumstances of each disposition are considered when determining the disposed asset for tax purposes. But the final regs make clear that the asset may not consist of items placed in service by the taxpayer on different dates. 

In the event that a taxpayer is unable to determine the depreciation of assets using traditional means, the regs allow for a “reasonable method” to be used if consistently applied. The regs (and likely the revenue procedures that will be published) provide guidelines in defining a reasonable method to be used. 

The final regs clarify the 2013 proposed regs regarding the manner of making disposition elections for assets included in General Asset Accounts (GAA). The regs provide rules for establishing, depreciating and disposing of assets from GAA’s. Each GAA may only include similar assets, those that placed in service the same year, with the same depreciation method including bonus depreciation. Each general-asset account is treated as the asset. 

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The final regs apply to tax years beginning on or after January 1, 2014, but taxpayers may choose to apply them to taxable years beginning on or after January 1, 2012.

1 See Department of Treasury IRS T.D. 9689 

Armanino Tax Insights and Alerts are provided as an educational service by Armanino LLP for clients and friends of the firm. The communication is an overview only, and should not be construed as legal or tax advice or advice to take any specific action. Individuals should consult with their personal tax/legal advisors before making any tax/legal-related decisions. 

IRS Circular 230 Disclosure. IRS regulations generally provide that, for the purpose of avoiding federal tax penalties, a taxpayer may rely only on formal written advice meeting specific requirements. Any tax advice does not meet those requirements and is not intended or written to be used, and cannot be used, for the purpose of avoiding federal tax penalties or promoting, marketing or recommending to another party any transaction or matter addressed herein.

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