PARTIAL ASSET DISPOSITION COST SEGREGATION
Tangible Property Regulations
The Tangible Property Regulations (also known as Repair Regulations) are the largest change to US Tax Law in 30 years and affect every building owner in America. The final regulations provide a general framework for distinguishing capital expenditures from supplies, repairs, maintenance, and other deductible business expenses. Building owners and their tax professionals now have strict guidelines as to what stays on a fixed asset schedule and what must come off. Not only must every building owner in America follow and apply these regulations to their accounting practices, but there may be a financial upside to doing so. Our Cost Segregation Study reviews the regulations to assist with compliance along with the financial benefit.
We provides the necessary calculations for business owners to apply the Tangible Property Regulations; this is coordinated with your tax professional.
Partial Asset Disposition (Write-down of disposed assets)
When a taxpayer makes an improvement to a unit of property, the project often includes demolishing or removing a portion of the property. A write-down can be taken on the items removed from the building, but this must be done in the year the items were removed. We provide the calculation for Partial Asset Dispositions when business owners make improvements to their buildings.
Removal and Disposal Cost (Write-down of cost of removal and disposal)
A taxpayer who has made the Partial Asset Disposition election can also deduct the costs of a project associated with removing and disposing components of the building. This write-down would be done instead of capitalizing these costs with the improvement costs, but it also must be done in the year of the disposition deduction. We provide the calculation for Removal and Disposal Cost which occurs when improvements are made to buildings.
Capital to Expense Reversal (Write down of previously capitalized assets)
Have you replaced items in your building in the past? Replaced a roof or parts of a roof? Replaced HVAC equipment or completed entire renovation(s) to your building? The new Repair Regulations state that there be no “ghost assets” on your fixed asset schedule. Our Cost Segregation Study will find duplicate items that are currently being depreciated and identify them, along with their value, for a write-down. We provide an analysis for the calculations to be applied for historical capital assets that may now be reversed to expense.
Partial Asset Disposition (PAD) Analysis
The IRS has formally approved the ability to dispose of the remaining cost basis of assets previously retired, replaced, or demolished. This is outlined in the Tangible Property Regulations (IRC §1.168 (i)-8) and can be a tremendous vehicle for tax savings.
Our process includes a review of the existing depreciation schedules, demolition drawings, and other pertinent information. The team also assesses the scope of recently completed capital work to determine the potential for disposition. When this review identifies assets ripe for disposition—but does not warrant a Standard Cost Segregation Study—we suggest our Partial Asset Disposition (PAD) Analysis.
As defined in the Tangible Property Regulations, a PAD Analysis may be conducted in one of three ways:
- A full engineering-based cost methodology, such as cost segregation
- A pro rata pricing process (if original pricing for a property is available)
- A Producer Price Index calculation as outlined in the Tangible Property Regulations
The outcome of our PAD Analysis is a report that quantifies and presents the value of dispositions, outlines when the assets were placed into and taken out of service, and describes the asset(s) in question. With this information, the client may determine the remaining depreciable basis to support a Partial Asset Disposition election. A PAD Analysis can also be used to update existing Unit of Property values.
Tangible Property Repair (TPR) Regulations
Taxpayers can realize significant benefits from the Tangible Property Repair (TPR) regulations by identifying building components that have been replaced or demolished in current or prior years and claiming retirement loss deductions. However, it is often difficult to determine the tax basis of each component without a cost segregation study. While the IRS agrees that a cost segregation study can be used for this purpose, they also allow the “PPI discounting approach” that our calculator utilizes. For more information on the IRS rules related to the PPI discounting approach, see T.D. 9689 Guidance Regarding Dispositions of Tangible Depreciable Property.