Disposition Studies

What is a Disposition Study?

Recent changes to tax regulations have allowed taxpayers to dispose of individual building components when they are retired, demolished or abandoned; where previously the IRS viewed a building as a single Unit of Property (UoP) and were required to continue depreciating components until they had been fully depreciated.

The new regulations (IRS Code 1.168(i)-8(d)(2)) allows a property owner to dispose or “write-off” certain components provided that a detailed report has properly broken out individualized units of property within the larger unit. However, a taxpayer may have these benefits lost if it fails to consider them and perform the disposition in a timely manner.

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What are Partial Dispositions?

Structural components of a building include items with a long tax life (generally 39, 27.5 or 15 years) such as lighting, roofs, HVAC systems, interior and exterior walls, etc. The new regulations (Regs. Sec. 1.168(i)-8(d)(2)) allow you to assign a value to those items and write them off when demolished, abandoned, or retired.

The IRS has provided 3 ways to calculate dispositions:

1. Through a detailed cost-segregation study, which identifies all 39-year property, in addition to the typical 5, 7, or 15 year class life property; or

2. Discounting the cost of a replacement asset to its placed-in-service year cost using the Producer Price Index for Finished goods, the Producer Price Index (PPI) for Final Demand, or other index designated by guidance in the Internal Revenue Bulletin. This method can only be used if the replacement asset is a restoration as defined in § 1.263(a)-3(k); it cannot be used if the replacement is a betterment as defined in § 1.263(a)-3(j) or an adaption as defined in § 1.263(a)-3(l); or

3. Pro rata allocation of the unadjusted depreciable basis of the MAA based on the re-placement cost of the disposed asset and the replacement cost of all assets in the MAA (or pool); Similarly, if a portion of an asset is disposed of, a pro rata allocation of the unadjusted depreciable basis of the asset based on the replacement cost of the disposed portion of the asset and the replacement cost of the asset. In order to take a partial disposition, the taxpayer should be able to verify the following:

1. Disposed of a portion of a MACRS asset owned by taxpayer
2. Identified the asset that was partially disposed
3. Determined the placed-in-service date of the partially disposed asset
4. Determined the adjusted basis of the disposed portion
5. Reduced the adjusted basis of the asset by the disposed portion

Green Summit Engineering has developed software to calculate partial dispositions using #2 above. The software can be found at: www.dispositioncalculator.com

See the Journal of Accountancy article on "Electing the benefits of partial dispositions": www.journalofaccountancy.com/issues/2016/sep/partial-disposition-election.html

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Material Guidelines For Dispositions Under I.R.C. §1.168(I)

Definition of disposition

A disposition occurs when ownership of the asset is transferred or when the asset is permanently withdrawn from use either in the taxpayer’s trade or business or in the production of income. A disposition includes the sale, exchange, retirement, physical abandonment, or destruction of an asset. A disposition also includes the retirement of a structural component (or a portion thereof) of a building only if the partial disposition rule applies to such structural component (or a portion thereof). Finally, the manner of disposition (for example, abnormal retirement or normal retirement) is not taken into consideration in determining whether a disposition occurs or gain or loss is recognized.

Partial dispositions

The partial disposition rule allows taxpayers to claim a loss upon the disposition of a structural component (or a portion thereof) of a building or upon the disposition of a component (or a portion thereof) of any other asset without identifying the component as an asset before the disposition event. The partial disposition rule also minimizes circumstances in which an original part and any subsequent replacements of the same part are required to be capitalized and depreciated simultaneously. In many cases, the partial disposition rule is elective (“partial disposition election”). However, consistent with the 2013 proposed regulations and the operation of sections 165, 168(i)(7), 1031, and 1033, and because sales of a portion of an asset are common, the partial disposition rule is required to be applied to a disposition of a portion of an asset as a result of a casualty event described in §165, to a disposition of a portion of an asset for which gain (determined without regard to §1245 or §1250) is not recognized in whole or in part under §1031 or §1033, to a transfer of a portion of an asset in a step-in-the-shoes transaction described in §168(i)(7)(B), or to a sale of a portion of an asset. Consequently, a disposition includes a disposition of a portion of an asset under these circumstances, even if the taxpayer does not make the partial disposition election for that disposed portion. For other transactions, a disposition includes a disposition of a portion of an asset only if the taxpayer makes the partial disposition election for that disposed portion.

A taxpayer may make the partial disposition election for the disposition of a portion of any type of MACRS property, including an asset that is properly included in one of the asset classes 00.11 through 00.4 of Rev. Proc. 87–56. However, consistent with §168(i)(6) and the 2013 proposed regulations, a taxpayer making the partial disposition election for the disposition of a portion of an asset that is properly included in one of the asset classes 00.11 through 00.4 of Rev. Proc. 87–56 must classify the replacement portion of the asset under the same asset class as the disposed portion of the asset.

The partial disposition election is made on the taxpayer’s timely filed original Federal tax return, including extensions, for the taxable year in which the portion of the asset is disposed of by the taxpayer. This election may not be made or revoked by the filing of an application for a change in method of accounting. A taxpayer may revoke a partial disposition election by filing a request for a letter ruling and obtaining the consent of the Commissioner of Internal Revenue to revoke this election. The Commissioner may grant a request to revoke this election if the taxpayer acted reasonably and in good faith, and the revocation will not prejudice the interests of the Government. In deciding whether to grant such a request, the Commissioner anticipates applying standards similar to the standards under § 301.9100–3 of this chapter for granting extensions of time for making regulatory elections. If a taxpayer chooses to apply these final regulations to its taxable year beginning in 2012 or 2013, these final regulations also provide rules for making the partial disposition election for the portion of an asset disposed of by the taxpayer during those taxable years.

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