United States

IRS releases final disposition regulations

TAX ALERT  | 

On Aug. 14, 2014, the IRS released the long-awaited final regulations on the disposition of tangible depreciable property and the treatment of general asset accounts (GAAs) under section 168. Largely unchanged from the proposed regulations issued in September 2013, the final regulations provide identical rules regarding defining assets for purposes of dispositions, electing GAA treatment for one or more assets, making the partial disposition election (for an asset excluded from a GAA), and electing to recognize the disposition of all assets (or the last asset) or a qualifying disposition from a GAA.

However, the final regulations modify the proposed regulations in certain areas. For example, the regulations substitute the use of the Consumer Price Index for the Producer Price Index for Finished Goods or the Producer Price Index for Final Demand when determining the unadjusted basis of an asset in a disposition from a multiple asset account or a disposition of a portion of an asset. This reasonable method is available only if the replacement portion is a restoration under Reg. section 1.263(a)-3(k) and not a betterment or adaptation under Reg. section 1.263(a)-3(j) or (l).

The final regulations also provide guidance to taxpayers electing to terminate a GAA upon the disposition of all assets or the last asset in such account or electing to recognize a qualifying disposition where the loss is sustained on account of the demolition of a structure to which section 280B applies. In this case, the regulations clarify that the loss must be capitalized to the land under section 280B, and that the taxpayer makes either election by ending depreciation for the demolished structure at the time of disposition and reporting the depreciation amount for that structure for the tax year in which the disposition occurs.

Though the final regulations are generally effective for tax years beginning on or after Jan. 1, 2014, taxpayers have the option of applying the regulations for tax years beginning in 2012 or 2013. 

The IRS has not yet released updated transitional guidance (modifying or superseding Rev. Proc. 2014-17). It is expected that such guidance will be issued within the next several weeks and that the guidance will provide for the ability to revoke a GAA election, make a late GAA election, and make the late partial disposition election through a Form 3115 for tax years beginning in 2014.

Taxpayers should consult with their tax advisors to determine the impact the final regulations will have on their operations and to determine whether early-adopting the regulations is advisable.

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