The Tangible Property "Repair" Regulations: Asset Accounting and DispositionsJune 08, 2012
Crystal Germanese, CPA
The temporary regulations allow taxpayers to account for MACRS property by either treating each asset as an account (a “single asset account” or “item account”) or combining two or more assets in a single account (as a “multiple asset account” or “pool”). A taxpayer must account for a MACRS asset using a single asset account when the asset is used both in a trade or business and in a personal activity, the asset is placed in service and disposed of during the same tax year, when the general asset account treatment terminates, if accounted for in a multiple asset account and is disposed of, or if a component of a larger assets and is disposed.
Each multiple asset account must include only assets that have the same depreciation method, recovery period, convention and placed-in-service year. A taxpayer is allowed to establish as many accounts for assets as the taxpayer wants.
Example: Y, a corporation in the wholesale distribution business, is allowed to use a single multiple asset account for most of its items of five-year property that are placed in service in Year Z, and have the same depreciation method and convention even though the assets may have different uses (for example, copiers, forklifts and equipment in the distribution warehouse). Alternatively, Y is allowed to choose to account for the items of five-year property in more than one multiple asset account, each as a single asset account, or in a combination of single and multiple asset accounts.
The temporary regulations also address bonus depreciation by requiring that taxpayers establishing multiple asset accounts or pools group assets eligible for bonus depreciation only with other assets for which the taxpayer is claiming the same percentage of bonus depreciation.
Taxpayers can also simplify depreciation for assets in the same asset class, that are depreciated using the same method and convention over the same recovery period, by electing to group these together into a general asset account. The temporary regulations modify many of the general asset account rules including to reflect the availability of bonus depreciation and provide special rules for mass assets, listed property, materials and supplies and leasehold improvements.
The temporary regulations also provide that a taxpayer must depreciate a building and all of its structural components using the same recovery period, depreciation method and convention even though each of the structural components is a separate asset under the temporary regulations. As discussed below, consistent with the expansion of the definition of a disposition to include a retirement of a structural component of a building, the temporary regulations provide that each structural component of a building, condominium unit or cooperative unit is the asset for disposition purposes.
The temporary regulation defines that, in general, 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, destruction of an asset, or occurs when an asset is transferred to a supplies, scrap, or similar account. However, in the case of a taxpayer who made an election to treat the cost of any material and supply as a capital expenditure, the taxpayer will need consent of the Commissioner to revoke the election to dispose of the material and supply by transferring it to a supplies account.
The temporary regulations also expanded the definition to add that a disposition also includes the retirement of a structural component of a building. Now the taxpayer will not have to continue depreciating amounts allocable to structural components that have been removed from service. For example if the taxpayer owned a building, replaced the entire HVAC system and capitalized the new system, under the old rules the taxpayer would continue depreciating the original HVAC system that was capitalized as part of the building.
Note: As discussed below, the temporary regulations provide that a reasonable method should be used to determine the amount of the adjusted basis of the property that is removed. Comments are requested on computational methodologies or safe harbors for taxpayers since most taxpayers will not have the separate components of the building broken out at purchase.
The existing rules for dispositions from a general asset account allow a taxpayer to elect to terminate general asset account treatment for "qualifying dispositions". Consistent with the expansion of the definition of disposition to include the retirement of a structural component of a building, the temporary regulations expand this definition to include most dispositions.
In general, a taxpayer must specifically identify which asset is disposed. If a taxpayer accounts for the assets disposed of in a multiple asset account or pool and specific identification is impracticable, the taxpayer may identify the asset disposed of by using:
- A first-in, first-out method,
- A modified first-in, first-out method where the taxpayer can identify the unadjusted basis of the asset disposed,
- A mortality dispersion table if the asset disposed is a mass asset grouped in a general assets account with other mass assets, or
- Any other method as the Secretary may designate by publication but a last-in, first-out method is specifically not permitted.
The adjusted basis of an asset disposed in multiple asset accounts or that are components that cannot be determined by the taxpayer's records can be calculated by using any reasonable method that is consistently applied. The depreciation allowed or allowable for the asset disposed of is computed by using the depreciation method, recovery period and convention applicable to the multiple asset account or the larger asset in the case of a component.
Example: X replaces one of the building's elevators. Because X cannot identify the cost of the structural components of the office building from its records, X uses a reasonable method that is consistently applied to all of the structural components of the office building to determine the cost of the elevator. Using this reasonable method, X allocates $150,000 of the $20,000,000 purchase price for the building to the retired elevator. Using the optional depreciation table that corresponds with the general depreciation system, the straight-line method, a 39-year recovery period, and the mid-month convention, the depreciation allowed or allowable for the retired elevator as of December 31, 2011, is $9,457.50.
We have compiled a series of additional articles to help taxpayers understand the new rules and understand how they will be implemented.
- Amounts Paid to Acquire or Produce Tangible Property
- Improvement to Tangible Property
- Unit of Property for Purposes of Determining Improvement
- Change In Accounting Method to Comply With the Tangible Property Regulations