On September 8, 2014, the IRS updated Revenue Procedure 2014-54, which provides guidance on certain changes in methods of accounting for dispositions of tangible depreciable property. Within this guidance, the IRS extended the time for making a late partial disposition election by one year.
A partial disposition election allows the taxpayers to treat the retirement of structural components of a building (i.e. a roof), a piece of machinery, or other "ghost assets" as a current year disposition. The taxpayer can then take a current year loss/deduction on the remaining cost basis of the structural component. The election typically covers the current year, however a late partial disposition election allows a taxpayer to go back in prior years and remove previously retired components. (Note: the partial disposition deduction is not available unless the election is made.)
Consider the following example. A calendar year taxpayer places a building in service in 1990. In 2005, the taxpayer replaces the entire roof of the building. Under prior rules, the new roof is required to be capitalized as an improvement and depreciated. Therefore the old 1990 roof and the 2005 roof were being depreciated, despite the 1990 roof no longer being attached to the building. In 2014, the taxpayer may make a late partial disposition election to stop depreciating the old roof and deduct its remaining basis.
Please contact a KOS advisor today if you would like to discuss how this election may apply to you or the next steps needed to obtain available tax benefits under the new Regulations.