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Understanding the New Tangible Property Regulations: Dispositions and General Asset Accounts


11/27/13

I. Introduction
 
On September 13, 2013, the U.S. Government issued final regulations and reissued proposed regulations providing guidance on the treatment of costs incurred to acquire, maintain and dispose of tangible property.  In this series of alerts, CohnReznick will explain the new regulations as they apply to the lifecycle of tangible property, from defining the units of property, the acquisition of tangible property, the de minimis rules, repairs and improvements to tangible property, and the disposition of tangible property, including the use of general asset accounts. This alert, the final of six, will cover the treatment of disposition costs and the placement of property in a general asset account (GAA).
 
II. Disposition of Tangible Property
 
The final regulations provide specifically for the disposition of materials and supplies under Treas. Reg. § 1.162-3(g), and the proposed regulations provide for the disposition of tangible, depreciable property under Prop. Treas. Reg. § 1.168(i)-8.

a. Sale or Disposition of Materials and Supplies

Upon sale or disposition, materials and supplies are not treated as a capital asset. If a taxpayer makes an election to capitalize and depreciate an asset, the asset will not be treated as a material or supply.1 Therefore, materials and supplies usually will be deductible in the taxable year in which they are disposed. Alternately, the taxpayer may choose an optional method of accounting for rotable and temporary spare parts. In this optional method, the taxpayer deducts the amount paid to acquire or produce the part in the year the part is first installed on a unit of property. When the part is removed from the unit of property, the taxpayer must include the fair market value of the part in the taxpayer’s gross income. Further, the taxpayer must add the fair market value of the part and the amount paid to remove the part from the unit of property.2

b. Disposition of Tangible Property

The proposed regulations apply to dispositions of tangible, depreciable property;3 and expand the definition in the 2008 proposed regulations of “disposition” to include the sale, exchange, retirement, physical abandonment, or destruction of an asset, or the retirement of a structural component.4 Taxpayers must first determine the asset being disposed based upon the facts and circumstances of the disposition.5 For instance, a taxpayer who consistently treats each component of an aircraft as an asset cannot recognize a loss for the disposition of the aircraft as a whole. The taxpayer may only recognize the loss for the major components when the components are disposed of. The asset generally cannot be larger than the UOP in which it is situated.6 Exceptions exist when buildings, condominiums, and structural components are the disposed assets.7 A taxpayer who disposes of a building will recognize a loss when the entire building is sold, not when a component of the building is replaced or disposed of.  
 
At the time of disposition, the adjusted basis of the asset generally will be its adjusted depreciable basis.8 Any resulting gain or loss depends on the manner in which the asset is disposed.9 If the asset is disposed of by sale, exchange, or involuntary conversion, gain or loss will be applied normally.10 If the asset is disposed of by physical abandonment, the taxpayer will recognize loss. The loss will be the adjustable depreciable basis of the asset at the time of abandonment.11 If the asset is disposed of in any other way, the taxpayer will also recognize loss. The loss will be the excess of the asset’s adjusted depreciable basis at the time of disposition over the asset’s fair market value at the time of disposition.12 
 
In order to determine which asset is being disposed of, generally the facts and circumstances of each disposition are considered.13 In addition to the general rule, the proposed regulations also contain certain special rules.14 When disposing of an asset in a GAA, each building and the structural components of that building are considered the asset, rather than the structural components of a building being separate assets than the building itself.15 The significance of this change is that taxpayers may forgo a loss when disposing of a structural component of a building without having to make a GAA election, as was required under the 2011 temporary regulations.
 
When a taxpayer includes an item in one of the asset classes 00.11 through 00.4 of Rev. Proc. 87-56, each item is considered a separate asset.16 Moreover, if the taxpayer places in service an addition or improvement to an asset after placing the asset in service, the new improvement or addition will become a separate asset.17
 
III. General Asset Accounts
 
The proposed regulations provide that assets may be accounted for in one or more GAAs if the assets are subject to depreciation under Section 168.18 An asset will be included in a GAA only to the extent of the asset’s unadjusted depreciable basis.19 On the contrary, an asset will not be included in a GAA if: (1) the asset is used both in a trade or business and in a personal activity at any time during the taxable year in which the taxpayer places the asset in service; or (2) the asset is placed in service and disposed of during the same taxable year.20
 
Further, when a taxpayer makes a GAA election, assets that are subject to the election are grouped into one or more GAA’s.21 Each GAA must only include assets that meet the all of the following requirements: (1) have the same applicable depreciation method; (2) have the same applicable recovery period; (3) have the same applicable convention; and (4) are placed in service by the taxpayer in the same taxable year.22 When a taxpayer makes a GAA election, the taxpayer consents to and agrees to apply the rules of the proposed regulations to the assets included in a GAA.23 
 
IV. Partial Disposition
 
The proposed regulations also contain the partial disposition rule, which applies to the disposition of a portion of an asset. While generally being an elective rule, the partial disposition rule is required to be applied in the following situations:

  • A disposition of a portion of an asset as a result of a casualty event described in Section 165;
  • A disposition of a portion of an asset in a GAA for which gain (determined without regard to Section 1245 or 1250) is not recognized in whole or in part under Section 1031 or Section 1033;
  • A transfer of a portion of an asset in a GAA in a transaction described in Section 168(i)(7)(B); or
  • A sale of a portion of an asset in a GAA.24
     

For other transactions than the four listed above, a disposition includes a disposition of a portion of an asset in a GAA only if the taxpayer makes an election to terminate the GAA in which that disposed portion is included.25
 
Another change in the proposed regulations is that taxpayers may claim a loss upon the disposition (or a portion thereof) of a structural component of a building without identifying the component as an asset before it is disposed, if the taxpayer claims a partial disposition election.26
 
V. Qualifying Dispositions
 
A taxpayer may dispose of an asset in a qualifying disposition by terminating GAA for the asset as of the first day of the taxable year in which the qualifying disposition occurs.27 The amount of gain, loss, or other deduction for the asset in a qualifying deposition is determined by taking into account the asset’s adjusted depreciable basis at the time of the disposition.28
 
The proposed regulations define qualifying dispositions as a disposition that does not involve all the assets, or the last asset, remaining in a GAA and that is:

  • A direct result of a fire, storm, shipwreck, or other casualty, or from theft;
  • A charitable contribution for which a deduction is allowable under Section 170;
  • A direct result of a cessation, termination, or disposition of a business, manufacturing, or other income producing process, operation, facility, plan, or other unit (other than by transfer to a supplies, scrap, or similar account); or
  • A transaction to which a nonrecognition section of the Internal Revenue Code applies.29
     

VI. Basis Determination of the Asset
 
After identifying the asset in a GAA that is to be disposed of or converted, the taxpayer may use any reasonable method that is consistently applied to all assets in the same GAA, for purposes of determining the unadjusted depreciable basis of the asset.30
 
The proposed regulations provide some examples of what constitutes a reasonable method, which are listed below:

  • Discounting the cost of the replacement asset to its placed-in-service year cost using the Consumer Price Index;
  • A pro rata allocation of the unadjusted depreciable basis of the GAA based on the replacement cost of the disposed asset, and the replacement cost of all of the assets in the GAA; and
  • A study allocating the cost of the asset to its individual components.31
     

View our previous alerts in the series:

Understanding the New Tangible Property Regulations: Final Regulations Issued
Understanding the New Tangible Property Regulations: Unit of Property
Understanding the New Tangible Property Regulations: Acquisition of Tangible Property
Understanding the New Tangible Property Regulations: De Minimis Rules
Understanding the New Tangible Property Regulations: Repairs and Improvements
 



1See Treas. Reg. § 1.162-3(g); I.R.C. §§ 1221, 1231.
2Treas. Reg. § 1.162-3(e)(2). 
3See Prop. Treas. Reg. § 1.168(i)-8(a). The property covered is either MACRS property or other depreciable property that would be MACRS but for the taxpayer’s election to expense or amortize the property’s cost.
4Prop. Treas. Reg. § 1.168(i)-8(b)(2).
5Prop. Treas. Reg. § 1.168(i)-8(c)(4).
6See previous alert for discussion of UOP.
7Prop. Treas. Reg. § 1.168(i)-8(c)(4)(ii).
8Prop. Treas. Reg. § 1.168(i)-8(f)(1).
9Prop. Treas. Reg. § 1.168(i)-8(e).
10Prop. Treas. Reg. § 1.168(i)-8(e)(1).
11Prop. Treas. Reg. § 1.168(i)-8(e)(2).
12Prop. Treas. Reg. § 1.168(i)-8(e)(3).
13Prop. Treas. Reg. § 1.168(i)-1(e)(2)(viii)(A).
14Prop. Treas. Reg. § 1.168(i)-1(e)(2)(viii)(B).
15Prop. Treas. Reg. § 1.168(i)-1(e)(2)(viii)(B)(1). In the temporary regulations that were issued in 2011, the structural components of a building were considered a separate asset from the building itself when determining the asset disposed of in a GAA.
16Prop. Treas. Reg. § 1.168(i)-1(e)(2)(viii)(B)(3).
17Prop. Treas. Reg. § 1.168(i)-1(e)(2)(viii)(B)(4).
18Prop. Treas. Reg. § 1.168(i)-1(c)(1)(i).
19Prop. Treas. Reg. § 1.168(i)-1(c)(1)(i).
20Prop. Treas. Reg. § 1.168(i)-1(c)(1)(i).
21Prop. Treas. Reg. § 1.168(i)-1(c)(2)(i).
22Prop. Treas. Reg. § 1.168(i)-1(c)(2)(i)(A)-(D).
23Prop. Treas. Reg. § 1.168(i)-1(l)(1).
24Prop. Treas. Reg. § 1.168(i)-1(e)(1)(ii).
25Prop. Treas. Reg. § 1.168(i)-1(e)(1)(ii).
26Prop. Treas. Reg. § 1.168(i)-1(e)(1).
27Prop. Treas. Reg. § 1.168(i)-1(e)(3)(iii)(A).
28Prop. Treas. Reg. § 1.168(i)-1(e)(3)(iii)(A).
29Prop. Treas. Reg. § 1.168(i)-1(e)(3)(iii)(B).
30Prop. Treas. Reg. § 1.168(i)-1(j)(3).
31Prop. Treas. Reg. § 1.168(i)-1(j)(3).


Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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