Businesses and organizations that have recently made improvements to their property may be eligible for tax savings based on a recent IRS ruling.
Businesses that have made recent improvements to their property may be eligible for tax savings. The opportunity comes from an IRS ruling that clarifies when an expenditure qualifies as a deductible repair and when it should be treated as a capital expenditure. But there is a limited window of opportunity to go back and claim a loss on property improvements (for example a rebuilt roof), that was previously claimed as an expense.
Background
Late in 2013, the IRS issued final repair regulations that defined what is a loss and what is an expense. An integral part of the ruling is the ability to claim a loss on the disposition of old major components of replaced real estate and equipment. Then in 2014, the IRS issued accounting method change guidance for claiming disposition losses that may not have been claimed due to the limited guidance or uncertainty of the earlier proposed regulations.
Roof repair example
A common example is the business owner who replaced and capitalized the roof on a building but did not claim a disposition loss for the old roof. That loss, even if arising from a partial disposition five or 10 years ago, can now be claimed on 2014 tax returns with an automatic consent accounting method change. But it only works for 2014 if the return is filed by the due date (including extensions).
So if the owner purchased or constructed a building in 1998 and in 2012 incurred the cost of a significant roof replacement, the business can now isolate the replaced roofing components from the 1998 building asset, and dispose of those components. In essence, a building would not have two roofs (assets) on a depreciation listing when one has been disposed.
The partial loss opportunity
Partial disposition losses were first authorized under recent drafts of the repair regulations. The ideal candidates are taxpayers who are real estate intensive and have made roof or other capitalized replacements to 27.5 or 39-year buildings that involve the removal of the old component. This likely includes renovations, remodeling, or significant building refreshes. The loss deduction — equal to the remaining undepreciated basis in the old component — must be claimed no later than the return reflecting the tax year beginning in 2014 under automatic consent accounting method change procedures outlined in Revenue Procedure 2014-54.
Deadline for accounting method change
The late partial disposition election is permitted for any tax year beginning on or after January 1, 2012, and beginning before January 1, 2015. However, to file an automatic consent accounting method change under the new procedure, IRS Form 3115 must also be filed in a timely manner.
How we can help
A tax advisor can review your depreciation schedules to determine if a loss opportunity is available, and to help you capture tax benefits that will otherwise be deferred to future years.