On September 18, 2014 the Internal Revenue Service released an advance copy of Rev. Proc. 2015-54. This revenue procedure describes how to implement the final regulations of Treasury Decision 9689. We will provide brief overviews of the final regulations and Rev. Proc. 2014-54, identify key changes and describe important opportunities. Read the full article here.
Treasury Decision 9689 Overview
The final regulations generally retain all of the provisions of the 2013 proposed reliance regulations on the disposition of MACRS property. They also amend the rules for general asset accounts and accounting for MACRS property. These final regulations generally apply to tax years beginning on or after January 1, 2014, but may be early adopted for tax years beginning on or after January 1, 2012.
Accounting for MACRS Assets Overview
MACRS assets generally are treated as single asset accounts or multiple asset accounts. Consider an office desk treated as a single asset account. The desk is placed into service under the applicable depreciation convention (half-year), using the designated depreciation method (200% declining balance), and recovering its cost over the designated recovery period (seven years). When assets are placed in service in the same taxable year and use the same depreciation convention, depreciation method and recovery period, they can be combined into a multiple asset account. For example, a taxpayer may purchase 150 desks in 2014 for use in its corporate offices and treat the 150 desks as a multiple asset account, i.e. multiple assets treated as a single account in the taxpayer’s books and records. A multiple asset account is conceptually similar to a general asset account.
A general asset account (“GAA”) is an irrevocable election where at least one and usually many assets are treated as a single asset. Taxpayers make GAA elections on the Form 4562 of a timely filed tax return (including extensions). Though they share the same general rules for qualification, the primary difference between multiple asset accounts and general asset accounts is how assets are treated upon disposition. Since the entire GAA account is treated as a single asset, gain or loss on disposition of an individual asset generally is not recognized. Disposing of assets in a multiple asset account, however, would generally result in the recognition of gain or loss. GAA elections became popular after the 2011 temporary regulations required their use for taxpayers to recognize losses on the retirement of building structural components. (The 2013 proposed reliance regulations created a partial disposition rule that removed the need for the GAA election in this context).
Disposition Rules for MACRS Property Overview
Asset dispositions occur when ownership of an asset is transferred or when an asset is permanently withdrawn from use in a trade or business or income-producing activity. Dispositions include sales, exchanges, retirements, physical abandonments, or asset destruction. If a taxpayer makes a partial disposition election, dispositions also include the retirement of a building structural component or a portion of a structural component. Once a disposition occurs, the taxpayer must determine the appropriate disposed asset and determine the basis of that asset. The latter determination applies only to multiple asset accounts, GAAs and portions of an asset. Where taxpayers are not able to identify a disposed asset specifically, it may use a first-in-first-out identification method or a mortality dispersion table to identify the asset.
Major Changes in the Final Regulations
The final regulations clarify: (1) how to make certain disposition elections for assets in a GAA when section 280B applies; (2) how to treat the disposition of a building structural component; and (3) how to determine the unadjusted depreciable basis of an asset in a GAA or multiple asset account or a portion of an asset.
Section 280B and GAA Elections - Under section 280B, the adjusted basis and demolition costs of a demolished building are capitalized to a non-depreciable land account. If a demolished building is in a GAA and the taxpayer elects to terminate the GAA election, the final regulations clarify that no loss is recognized on the disposition, but rather that the building’s adjusted basis is capitalized to a non-depreciable land account. A taxpayer may elect out of GAA treatment: (1) following the disposition of the last asset (or portion of an asset) in the GAA, or (2) a qualifying disposition election. A qualifying disposition includes: (1) casualty or theft losses; (2) charitable contributions; (3) business cessations that do not include transfers to supplies, scrap or similar accounts; or (4) certain non-recognition transactions.
Disposed Building Structural Components - The final regulations, like the proposed regulations, use a narrower definition of qualifying dispositions for assets included in a GAA than the temporary regulations, which had included events such as the sale of an asset. The final regulations also treat a building and its structural components as the disposed asset, breaking the conformity with the improvement standards under section 263(a). If a taxpayer would like to recognize gain or loss on the disposition of assets in a GAA, the taxpayer must revoke its GAA election for those assets. The taxpayer may then make a partial disposition election to recognize a loss on the disposition of the building structural component.
Determining the Unadjusted Depreciable Basis of Certain Assets - The final regulations follow the proposed regulations and require taxpayers to use any reasonable method to determine disposed assets in a GAA or multiple account or portions of a larger asset. The primary change is that using the CPI to deflate the cost of a replacement asset is no longer a reasonable method. Taxpayers may instead use the Producer Price Index (PPI) for Finished Goods. Taxpayers that previously used the CPI should file a Form 3115 using change number 205 to use the PPI.
Important Opportunities in the Final Regulations
The final regulations highlight a number of areas that may require immediate action.
Late Partial Disposition Elections - Taxpayers generally must make a partial disposition election on their timely filed, original tax return (including extensions). The final regulations permit taxpayers to file a current accounting method change application to make a late partial disposition election for the 2012 and 2013 tax years. Taxpayers may also file an amended return for 2013 to make a late partial disposition election. Rev. Proc. 2014-54 allows taxpayers to file a Form 3115 under change number 196 to make a late partial disposition election for assets disposed of in pre-2012 tax years. This opportunity only applies through the 2014 tax year (tax years beginning before January 1, 2015).
Key Takeaway: Calendar-year taxpayers must have pre-2014 disposition studies completed and the related Forms 3115 filed by the extended due date of the 2014 tax return.
Section 280B and Late GAA Elections - An important consequence of the GAA election rules is that taxpayers can continue to depreciate a demolished building. If a building is in a GAA, however, depreciation continues until the GAA election terminates. Rev. Proc. 2014-54 permits taxpayers to make late GAA elections under change number 180 through the 2013 tax year (tax years beginning before January 1, 2014).
Key Takeaway: Unless your client is a fiscal year taxpayer or reports their property on Schedule E, they cannot take advantage of this opportunity retrospectively. Clients should be advised of this opportunity for 2014 tax year and later building acquisitions.
Late Revocation of GAA Election - Since a GAA election is no longer required to recognize loss on the retirement of building structural components, taxpayers who do not plan on demolishing a building during its remaining recovery period should consider filing a method change application to revoke their building GAA elections. Rev. Proc. 2014-54 allows taxpayers to file a Form 3115 using change number 197 to revoke a GAA election through the 2014 tax year (tax years beginning before January 1, 2015).
Key Takeaway: Most taxpayers who filed changes for retired structural components under the temporary regulations should consider revoking their building GAA elections. If they do decide to revoke the GAA election, a late partial disposition election is optional. So taxpayers that need income in 2014 should weigh their options on whether to make a late partial disposition election.
Rev. Proc. 2014-54 Overview
Revenue Procedure 2015-54 updates the automatic accounting method change procedures for GAA elections and asset dispositions under the final, temporary and proposed regulations. Important changes include:
In light of the other asset disposition procedures, change number 107 for landlords disposing of tenant improvements at lease termination is redundant and has been obsolete.
If section 280B applies to the disposition of a building, change number 177 has been clarified so that it can no longer be used to recognize loss on the building demolition.
As with Rev. Proc. 2014-17, this revenue procedure includes a comprehensive chart that lists all changes under the final, proposed, and temporary regulations.
The final disposition regulations and Rev. Proc. 2014-54 primarily carry over the rules announced in the proposed regulations and their related revenue procedure. The below chart summarizes the important action items for taxpayers going forward.
Taxpayer completed disposition study under the temporary regs.
Revoke building GAA election and make late partial disposition election.
No later than the 2014 tax year
Taxpayer disposed of original building structural components or portions of other assets in pre-2014 years.
Make late partial disposition elections for structural components by filing Form 3115 in the current year
No later than the 2014 tax year
Taxpayer disposed building structural component improvements or whole assets not in a GAA in prior years.
Change method to identify asset disposed of in the current year.
No later than the 2014 tax year
Taxpayer plans to demolish an entire building that it currently owns.
Make late GAA election for the building.
No later than the 2013 tax year
Taxpayer plans to acquire and demolish a building.
Make GAA election for building in year of acquisition.
Taxpayer completed disposition study under the proposed regs using the CPI to determine the unadjusted basis of the disposed assets.
Change method to use the PPI.
No later than the 2014 tax year