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Repair v. Capitalization and Form 3115 Chapter 4

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History • Dec. 2011-- Tangible property regs (TPR); effective TYBOA 2012, but optional. • Sept. 2013 Most of TPR regs. were finalized. • Sept. 2013 Proposed Regs. on Dispositions 2

• Aug. 14, 2014 -Disposition regs. finalized; mandatory in TYBOA 2014 but optional in 2012 and 2013. 3

• Sept. 18, 2014 – Rev Proc. 2014-54 Acct. Method Chg. Procedures for Dispositions under Final Regs. 93 Pages 4

Final Reg. Elections/ Safe Harbors

1) De Minimis Annual Election (1.263(a)-1(f))

2) Per-Building Small Business Safe Harbor Annual Election (1.263(a)-3(h)) 3) Routine Maintenance Safe Harbor -- Acct Method Chg. (1.263(a)-3(i))

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4)Partial Disposition Election (PDE) • If timely, PDE made by claiming loss on disposition (1.168-8(i)(d)(2)) • If late, an acct meth. change per Rev Proc 2014-54 5) Capitalization Annual Election (1.263(a)-3(n)) 6

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Timely PDEs 23

Partial Disposition Election (PDE) Taxpayers can claim a loss on the disposition of a structural component (or a portion thereof) of a building or upon the disposition of a portion of any other asset. (Reg. sec. 1.168(i)-8) 24

PDE Downside If the PDE election is made, the replacement cost is automatically treated as a restoration thus must be capitalized (so don’t make a PDE for a repair expenditure (no option with casualty loss))

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A timely PDE is NOT a change in accounting method Can only revoke PDE with IRS PLR 26

Reg. sec. 1.168(i)-8(i) Ex (9): •

Company purchases an office building for $20 million in 2011

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On June 30, 2014, E replaces one of the two elevators in the office building—a restoration.

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With a PDE, can claim a loss for the adjusted basis of the old elevator (liberate the “stranded basis”). 29

If company cannot identify elevator cost from records then use any reasonable method. 30

Final regs say the discounted CPI is no longer regarded as a reasonable method to calculate original cost. 31

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“[Company] determines the [$150,000] cost of the disposed elevator by discounting the cost of the replacement elevator to its placed in-service year cost using the Producer Price Index for Final Demand.” (PPI) 32

The PPI CANNOT be used if the elevator replacement is a betterment or an alteration.

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Company “recognizes a loss of $138,779 for the retired elevator in 2014.” 34

With Partial Disposition Election (PDE) • Capitalize cost of new elevator (restoration). • Deduct loss on disposition of old elevator. Reg. sec. 1.168(i)-8(d). • Deduct cost of removing old elevator. Reg. sec. 1.263-3(g)(2). 35

Late PDEs 38

A LATE partial disposition election IS a change in accounting method Form 3115 39

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Rev. Proc. 2014-54, extends the timeframe for making the LATE PDE election to any TYBOA January 1, 2012, and beginning before January 1, 2015. 40

Rev. Proc. 2014-54, also grants 20 “automatic” accounting method change approval for the LATE PDE election (must file Form 3115 change #196)

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Example •

Company purchases an office building for $20 million in 2001

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On June 30, 2008, E replaces one of the two elevators in the office building. 42

Example • With 2014 return, Company can file Form 3115 and write-off any remaining adjusted basis on the elevator, replaced in 2008, as a loss. 43

Late PDE also arises when IRS audit results in capitalization instead of repair. File Form 3115

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Form 3115

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Rev Proc 2014-54 Change # 196 Late PDE

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Form 3115 Part IV Section 481 Adjustment - $ XXX

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GAA Election And Revocation

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Final Regs on GAA Flip Rules 2013 Prop. and Aug. 2014 final regs: A GAA CANNOT make a PDE 54

So if you want that PDE flexibility, then revoke the GAA election on Form 3115 55

We finally learn how to undo the GAA election on Form 3115 in Feb. and Sept. of 2014 56

Rev. Proc. 2014-54 allows taxpayers to file a Form 3115 using change number 197 to revoke a GAA election through the 2014 tax year (TYBB 2015). 57

Form 3115

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Rev Proc 2014-54 Change # 197 Revoke GAA Election

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Form 3115 Part IV Section 481 Adjustment $0

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Making the GAA Election was Easy For TYBOA 1/1/2012

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GAA Election

Final Disposition Reg. GAA Benefit •

If demolition of the building is planned.

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With GAA, taxpayers can continue to depreciate a demolished building instead of capitalizing the loss to the land.

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Taxpayer that plans to acquire and demolish a building should consider making the GAA election for the building in year of acquisition (a timely GAA election) 64