IRS Finalizes MACRS Disposition & General Asset Account Regulations
 

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IRS Finalizes MACRS Disposition & General Asset Account Regulations

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The IRS has adopted final regulations (T.D. 9689) relating to dispositions of modified accelerated cost recovery system (MACRS) property and accounting for property in MACRS general asset accounts ...

The IRS has adopted final regulations (T.D. 9689) relating to dispositions of modified accelerated cost recovery system (MACRS) property and accounting for property in MACRS general asset accounts (GAAs). The final regulations generally retain all of the provisions of proposed regulations published is the Federal Register on September 19, 2013 (NPRM REG-110732-17).

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IRS Finalizes MACRS Disposition & General Asset Account Regulations Document Transcript

  • 1. IRS Finalizes MACRS Disposition and General Asset Account Regulations (article) The IRS has adopted final regulations (T.D. 9689) relating to dispositions of modified accelerated cost recovery system (MACRS) property and accounting for property in MACRS general asset accounts (GAAs). The final regulations generally retain all of the provisions of proposed regulations published is the Federal Register on September 19, 2013 (NPRM REG-110732-17). The final regulations apply to tax years beginning on or after January 1, 2014. A taxpayer may choose to apply the final regulations to tax years beginning on or after January 1, 2012. The IRS is soon expected to update Rev. Proc. 2014-17, I.R.B. 2014-12, 661, to provide accounting method change guidance for complying with the final regulations. Rev. Proc. 2014-17 currently only provides accounting method change guidance to comply with previously issued proposed, temporary, and final MACRS regulations. The final regulations retain the definition of a disposition contained in the proposed regulations and, therefore, continue to provide that a retirement of a structural component (or a portion of a structural component) of a building is generally a disposition (resulting in a loss deduction) only if a partial disposition election is made. A similar rule applies to components of assets other than buildings. The definition of a disposition continues to include the partial disposition of an asset in a sale, casualty event, like-kind exchange or involuntary conversion, or transfer in a Code Sec. 168(i)(7)(B) step-in-the shoes transaction even if no partial disposition election is made. Taxpayers who apply the final regulations to a tax year beginning in 2012 or 2013 may make partial dispositions elections for a portion of an asset disposed of during those years. Rev. Proc. 2014-17 also allows taxpayers to file an accounting method change for a 2013 tax year to make a late partial disposition election for partial dispositions that occurred in tax years beginning before 2012. Based on informal IRS guidance, practitioners expect that the updated version of Rev. Proc. 2014-17 will allow such accounting method changes to be made under the final regulations for a 2014 tax year. If it is impracticable for a taxpayer to determine from the taxpayer's records the unadjusted depreciable basis of a disposed asset (or disposed portion of an asset) that is accounted for either in an item, multiple asset, or general asset account, any reasonable method, if consistently applied, may be used to make the determination. The final regulations clarify that the impracticability requirement applies to all asset dispositions, including partial dispositions outside of multiple asset accounts. Indexed discounting continues to be a reasonable method.
  • 2. A study (e.g., cost segregation study) that allocates the cost of an asset to its individual components is also a reasonable method of determining unadjusted depreciable basis. In the case of a multiple asset account, a pro rata allocation of the unadjusted depreciable basis of the account based on the replacement cost of the disposed asset and the replacement cost of all of the assets in the account is a reasonable method. The final regulations also retain the rules in the proposed regulations for determining the asset that is disposed of. In general, the facts and circumstances are considered in making this determination. However, the asset disposed of may not consist of items placed in service on different dates (without taking into account the applicable MACRS convention). Condominiums, cooperative units, and additions and improvements to existing assets are treated as separate assets. The final regulations make no significant changes to the proposed general asset account (GAA) regulations. Each GAA may only include assets with the same depreciation method, period, and convention that are placed in service in the same tax year. Assets eligible for bonus depreciation cannot be placed in the same account as assets that are ineligible for bonus depreciation. The same bonus depreciation rate must apply to assets grouped in the same account. The basis of an asset or portion of an asset disposed of from a GAA is treated as zero. Accordingly, no loss is recognized upon the disposition of an asset from a GAA. A taxpayer continues to depreciate the general asset account, including the disposed asset, as though no disposition occurred. A taxpayer may elect to terminate a GAA and recognize gain or loss upon the disposition of all of the assets, the last asset, or the remaining portion of the last asset in the account. A taxpayer may elect to terminate GAA treatment for an asset in a GAA when the taxpayer disposes of the asset in a qualifying disposition. A qualifying disposition is a disposition that is: (a) the direct result of a casualty or theft, (b) a charitable contribution, (c) a direct result of a cessation, termination, or disposition of a business, or (d) a transaction to which a nonrecognition provision applies. Generally, a taxpayer makes an election to terminate a GAA or a qualifying disposition election by reporting gain or loss or other deduction on the taxpayer's timely filed return for the tax year of the disposition. The final regulations clarify that, in the case of a demolished structure for which Code Sec. 280B requires capitalization of the demolition loss to the basis of land, these elections are made by reporting on a timely filed return the depreciation allowed in the tax year of demolition for the period prior to the demolition taking into account the applicable convention. As in the case of the proposed regulations, the final regulations do not allow a taxpayer to recognize gain or loss on the disposition of a portion of an asset in a GAA by making a partial disposition election. Consequently, no loss may be recognized upon the retirement of a structural component of a building or other asset in a GAA unless the election to terminate the account upon the disposition of all of the assets, the last asset, or the remaining portion of the last asset in the account is made or a qualifying disposition election is made. However, the final regulations replace the consumer price index with the producer price index for finished goods (or its successor the producer price index for final demand) as the method of discounting the cost of a replacement asset for purposes of determining the unadjusted depreciable basis of a replaced asset or portion of an asset, such as a structural component. The producer price index, according to the IRS, reflects inflation for capital expenditures more accurately. Moreover, indexed discounting may only be used if the cost of replacement is a capitalized restoration under Reg. §1.263(a)-3(k). Restorations include the cost of replacement where gain or loss is recognized on the replaced component, for example, because a partial disposition election has been made. Indexed discounting may not be used if the replacement cost is a capitalized betterment or adaptation.
  • 3. CBIZ MHM is the brand name for CBIZ MHM, LLC and other Financial Services subsidiaries of CBIZ, Inc. (NYSE: CBZ) that provide tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly- traded and privately-held companies. - See more at: https://www.cbiz.com/Insights-Resources/Details/ArticleID/1589/IRS-Finalizes-MACRS-Disposition-and- General-Asset-Account-Regulations-article#sthash.GUeCzinj.dpuf Copyright © 2014, CCH INCORPORATED. All Rights Reserved. Contents of this publication may not be reproduced without the express written consent of CCH and CBIZ. To ensure compliance with requirements imposed by the IRS, we inform you that- unless specifically indicated otherwise-any tax advice in this communication (and any attachments) is not written with the intent that it be used, and in fact it cannot be used, to avoid penalties under the Internal Revenue Code, or to promote, market, or recommend to another person any tax related matter. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.