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IRS Finalizes Guidance on the Treatment of Tangible Property Under MACRs

October 23, 2014

 

Cynthia J. Abbamondi, CPA, MS
Tax Manager

On August 14, 2014, the IRS released final regulations on the treatment of dispositions of tangible property under the Modified Accelerated Cost Recovery System (MACRS) and Code Sec. 168. The final regulations clarify how taxpayers should identify which assets are subject to the rules, how to compute gain and loss from dispositions of assets (particularly in the context of general asset accounts), and how to approach partial dispositions of tangible property. The final regulations apply to tax years beginning on or after January 1, 2014.  However, taxpayers have several implementation options in regard to tax years beginning on or after January 1, 2012 and before January 1, 2014. 

Final Regulations

The changes made by the final regulations are relatively minor when compared to the proposed regulations that were issued in September of 2013. For example, the final regulations retain the definition of a disposition from the proposed reliance regulations. If a partial disposition election is made, the retirement of a component of an asset is considered a disposition, allowing the taxpayer to write off the cost of the component.

If it is impractical for a taxpayer to determine the unadjusted depreciable basis of the disposed asset (or disposed portion of an asset) from its records, the taxpayer may apply any reasonable method to make this determination, if consistently applied. However, a taxpayer cannot determine basis by discounting the cost of a replacement asset (that is a betterment or an adaptation to a new or different use) to determine the original basis of a replaced asset.

The final regulations also clarify but make no significant changes to the general asset account (GAA) regulations. If a taxpayer elects GAA treatment, it can continue to depreciate the assets in the account rather than track and account for the separate assets disposed. Assets eligible for bonus depreciation cannot be placed in the same account as assets that are ineligible for bonus depreciation. A taxpayer generally may elect to terminate GAA treatment if the taxpayer disposes of the asset in a qualifying disposition or if the taxpayer disposes of the last item in the GAA.

Now that the final disposition regulations have been released, taxpayers should review their current methods of accounting for dispositions of tangible property to determine if their methods comply with the new rules. 

For more information, please contact Cynthia Abbamondi at cabbamondi@blumshapiro.com or 860.570.6394.

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

 

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