Pub. 3 Issue 2

21 SUMMER 2015 completely removed from the taxpayer’s books and records (e.g. roof of a building). This is referred to as a partial disposition. EXAMPLE In 1995, a dealership purchased a facility for $4 million. In 2010, the dealership replaced the entire roof of the facility for $400,000. The remaining tax basis of the original roof was determined to be $200,000. The dealership capitalizes the $400,000 for the new roof and elects to claim a partial disposition loss of $200,000 for the old roof. This entire loss may be claimed in the current tax year. Absent a partial disposition election, the dealership would end up with two roofs on its books – claiming depreciation on both at the same time. Partial disposition opportunities generally follow a capitalized improvement – particularly one related to building property given its long recovery period. For the 2014 tax year only, taxpayers are permitted to look back in time – perhaps even twenty years - at their historical remodels and other improvements to determine whether a partial disposition loss is appropriate. After 2014, taxpayers may only claim a partial disposition loss related to an improvement which took place in the current year. Exposure Mitigation Upon review of the new regulations, some taxpayers may identify areas of exposure in prior tax years for their treatment of tangible property. Perhaps they have been aggressive in their repair vs. improvement determinations or have expensed materials and supplies earlier than was appropriate. Procedures in place to comply with the regulations may benefit these taxpayers by providing audit protection for open tax years or the ability to take negative adjustments into taxable income over four years. If the procedures are not followed and the exposure area is identified by the IRS during an examination, negative adjustments would be fully taken into taxable income for the current year. Relief for Small Taxpayers Compliance with the new regulations can be complex and may require a combination of elections and accounting method changes from taxpayers. For the past couple of years, small businesses and tax professionals have petitioned the IRS for some form of relief from the compliance burden, particularly for provisions which must be applied retrospectively. On 2/13/2015, the IRS responded with Rev. Proc. 2015- 20 which simplifies procedures for complying with the tangible property regulations for qualifying small taxpayers. These procedures are available for any business with total assets of less than $10 million or average gross receipts for the preceding three tax years of $10 million or less. They allow the new regulations to be applied on a prospective basis only – for the 2014 tax year and onward. Additionally, they do not require the filing of any accounting method change to bring a taxpayer into compliance. While the relief is welcome news to many, those that plan to take advantage of it need to fully understand the implications of doing so. First, the relief is not an exemption from the tangible property regulations in general. Additionally, any benefit from capitalized repairs or partial dispositions in tax years prior to 2014 may not be claimed. Finally, audit protection for tax years prior to 2014 is not received. California Conformity The state has confirmed that it will follow the provisions in the federal tangible property regulations, any federal accounting method changes filed pursuant to those regulations, and the small taxpayer relief provided by Rev. Proc. 2015-20. Final Thoughts The recent tangible property regulations are here to stay and affect decisions made by dealerships each and every day. Although no one size fits all approach to implementation exists, a taxpayer’s objectives will drive this process. At a minimum, compliance is required. However, a taxpayer may need to work with their tax advisor to determine what tax deferral and/or savings opportunities exist and whether it makes sense to pursue these. Significant effort will go into the 2014 tax year to ensure compliance is reached, all appropriate elections and accounting method changes are filed, and material opportunities have been addressed. Going forward, taxpayers will need a sufficient understanding of the regulations and may want to reevaluate their current processes to streamline compliance and better identify opportunities. 