New rules provide limited time opportunity to take current tax deductions for “late” partial dispositions.
By now, you should have a pretty good idea about the tax-saving opportunities provided by the final tangible property regulations for your clients that own commercial property. At the root of many of those opportunities is the fact that, for the first time, the IRS and Treasury have provided regulatory guidance that dictates how a unit of property (UOP) is defined.
The basic rule is that a UOP consists of all components that are functionally interdependent. For example, a forklift needs its battery to operate, so the forklift is the UOP and the battery is a component of the UOP. Conversely, a printer can work independently from a computer and so is considered a separate UOP. This definition of UOP is the foundation for the determination of whether an expense is a deductible repair or a capitalized improvement. In general, the smaller the UOP, the more likely the taxpayer must capitalize the cost incurred.
However, as with all tax law, the devil is in the details.
The Good News About Buildings
The final tangible property regulations include special rules for buildings. Instead of treating the entire building as a UOP, the rules state that the building and its structural components are a single UOP, while each of eight defined building systems is a separate UOP.
But there is good news here: Most of your clients have probably overcapitalized their expenditures, because they were following their book capitalization policy. While that may have made sense in the past, the final tangible property regulations require taxpayers to apply the new UOP definition. Applying the three-part improvement test to each UOP, while time-consuming, will likely result in significant opportunity to reclassify previously capitalized expenses as deductible repairs. And that’s what clients really like to hear!
Limited Time Opportunity to Write Off Old Components
The tangible property regulations provide another gift to building owners. While they are not yet final, new proposed regulations allow taxpayers to make an election to dispose of a structural component or a portion of a structural component. That means that those old roofs that are still on your clients’ books that have not been fully depreciated can now be swept away with one 481(a) adjustment. Most important to your clients, the remaining basis in all those old roofs is now currently deductible.
This opportunity to make the partial disposition election for previously disposed assets might be a once in a lifetime opportunity. As of right now, partial disposition elections are only available for TY13. While the final regulations (expected to come out in the Fall) might extend the partial disposition election for one more year, don’t take that chance. Make sure your clients know that they have the opportunity to tidy up their fixed asset accounts—and clean up in tax savings.
Cost Segregation Expertise Needed
What your commercial real estate clients really need to know is that there is a very important first step before they can make a partial disposition election or take current deductions for repairs that were previously capitalized. That step is a segregation of the building systems conducted by a qualified cost segregation specialist.
Properly classifying assets within each of the eight building systems, as well as identifying the original cost basis for previously disposed property, including removal costs, requires construction and engineering knowledge. If your firm does not have these capabilities in-house, your clients need to know that you have a strategic partnership with a provider of tax strategies based on an engineering foundation.
Contact us to find out how CSP360 can help you identify tax-saving opportunities while bringing your clients into compliance with the tangible property regulations.