The Internal Revenue Service on September 18 issued Rev. Proc. 2014-54, representing what should be the final significant piece of guidance on the far reaching tangible property regulations. Rev. Proc. 2014-54 provides automatic consent procedures for requesting accounting method changes necessary to comply with final regulations issued in August on dispositions of tangible property (see our Federal Tax Alert, IRS Finalizes MACRS Disposition and General Asset Account Regulations). All taxpayers that acquire, produce or improve tangible property are required to comply with the tangible property regulations in tax years beginning on or after January 1, 2014.

Historically, when a taxpayer replaced a significant component of an asset — such as the roof of a building, an elevator, an HVAC unit, etc. — the taxpayer had to continue to depreciate the old asset as well as the new replacement. The final property disposition regulations allow taxpayers to make a partial disposition election in the year of replacement to write off the undepreciated cost basis allocable to the replaced component, presuming the cost of the replacement component is capitalized.

Rev. Proc. 2014-54 permits taxpayers that disposed of a significant portion of an asset in previous years to make a late partial disposition election via an automatic accounting method change request to recover the undepreciated basis. A late partial disposition election can significantly accelerate substantial tax deductions. Assume, for example, that you replaced a roof two years ago on a building that you've owned for 10 years. Typically, it would take 29 more years to fully depreciate the cost allocable to the original roof, even though it no longer exists. By making a late partial disposition election, however, you can write off the remaining cost basis of that replaced roof all at once.

Taxpayers who can benefit from making a late partial disposition election need to act quickly. The ability to make a late partial disposition election is only available for tax years beginning on or after January 1, 2012 and beginning before January 1, 2015. This means taxpayers that did not make the late partial disposition election on their 2012 or 2013 tax returns have only one more chance. If they don't file the automatic accounting method change request on their 2014 tax returns to make the late partial disposition election, that opportunity will be lost forever.

Depending on how they calculated the remaining cost basis of the replaced component, taxpayers that did make the late partial disposition election on their 2012 or 2013 tax returns may need to file another accounting method change on their 2014 tax returns to correct it. When a taxpayer does not know the exact remaining cost basis of a replaced component (which will often be the case when the replaced component was acquired as part of a larger asset acquisition, for example, the roof of a building), the taxpayer can use any reasonable method to calculate the remaining cost basis of the replaced component.  

Under the proposed regulations, the "CPI rollback method", which took the cost of the replacement asset and rolled its cost back to the year the original component was placed in service based on the Consumer Price Indices in those years, was considered a reasonable method. Under the final regulations, however, the CPI rollback method is deemed unreasonable. Therefore, taxpayers who made partial disposition elections (late or current) on 2012 or 2013 tax returns using the CPI rollback method will need to file an accounting method change on their 2014 returns recalculating the write-off of the replaced component using a different method, such as the Producer Price Index rollback method (which the final regulations explicitly mention as a reasonable method).

While the late partial disposition election is the most significant accounting method change request in Rev. Proc. 2014-54, it is not the only one. Rev. Proc. 2014-54 updates many of the accounting method changes in Rev. Proc. 2014-17 to reflect changes between the proposed and final disposition regulations. See our Federal Tax Alert, New Tangible Property Guidance Allows Late Partial Disposition Elections, for more information on Rev. Proc. 2014-17.

For more information on the late partial disposition election and the tangible property regulations, consult your local CBIZ MHM tax professional.

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