The Elective Partial Disposition under the TPRs

5 minute read time.

The Elective Partial Disposition under the TPRs

By Bob McElroy, Certified Trainer, Sage University

 

 

Suppose your company bought a new building in 2000 for a cool $2 million. You created the asset record in your Sage Fixed Asset—Depreciation software (called “FAS” back in those days). And you depreciated it over a 39-year recovery period in your tax books. The record might look like this:

You replaced the building roof in April of this year. It cost $10,000 to remove the old roof, and you paid $60,000 for the new roof.

Under the new IRS Tangible Property Regulations (which became effective at the beginning of 2014), you are not required to perform a partial disposition on the building, but you may elect to do so. After all, you are no longer in possession of two roofs. And in fact, it might behoove you to record a partial disposition, but again, it is not required.

Click on the Dispose Asset option, available either on the Asset pull-down menu or in the bulleted task list in the navigation pane, and a dialog window will open. You will use this to record the disposal.

Beginning with the top left portion of the window, you complete the “when” and the “how” information related to the disposal. The third box asks if this is a partial disposal, and though it defaults to “No,” in this case, you will change the value to “Yes.”

Click the tab key once more, and another dialog box will appear, the Partial Disposal window.

The Book field defaults to Tax, but the cursor is on the right waiting for you to enter the amount of the disposal. In this case, you will enter $40,000, and add a pithy description. Now, the window might look like the above screenshot.

How did you arrive at $40,000? Let me explain. Let’s suppose a recent appraisal on the property valued the building at $3 million. You paid $60,000 for your new roof. That is 2% of its fair market value. Apply the 2% to your acquisition value of $2 million, and you are now disposing $40,000 from the original amount.

What about using the Tax book as the default book? Does it make any difference if the book is changed to Internal?

In this example, no. That’s because the same acquisition value was used across all books. Most of our clients, though not all, follow that method. This is a significant issue only if you use different acquisition values in different books. If you do, then ensure you enter a figure that represents the correct portion of the asset being disposed for the value represented in that particular book. The software will then apply that percentage across all of the books. Note that the percentage being applied is recapitulated in the table found at the bottom of the partial disposal dialog window.

Once the information for the partial disposal has been entered, click the OK button, and you will find yourself back in the main dialog window. Click the Calculate button, and the program will calculate the gains and losses in each book. Navigate to the Transactions tab, and you will see something like this:

 If you click on the left-hand button, View Transaction, you can return to the window to see the gains and losses that were calculated with the disposal (a partial disposal in this case). It will look something like this:

Return to the Main tab, and you see how the software program has automatically adjusted the acquisition value to take into account the portion that has been disposed out of it. Here is what is showing now on this asset record.

Next, you will need to add a new asset record to account for the new roof you just installed. Its acquisition value will be $70,000.   That figure includes the $60,000 you paid for the new roof plus the removal cost of $10,000. Did you notice that no expense costs were recorded on the disposal (refer to the screenshot above showing the disposal for the asset piece with the 001 extension)? That’s because the removal costs in this case were capitalized with the new roof. But it is not always that way. And where the removal costs are not capitalized, it may be appropriate to record them as expenses to the partial disposition depending on the situation. Here below is a brief recap of the rules.[1]

  • Removal costs incurred due to a betterment of the property are capitalized with the cost of the improvement.

Example: The building owner removes columns and girders from the 2nd floor in order to replace with stronger columns and girders that will support a load weight 50% greater than before. The cost of removing the old columns and girders is added to the cost of the new improvement and capitalized.

  • Removal costs incurred as a result of an elective partial disposition are not capitalized in the event there is no restoration or improvement made.

Example: The building owner removes columns and girders from the 2nd floor and elects to record a partial disposition from the building. Removal costs are not capitalized.

  • Removal costs incurred as a result of repair and maintenance activity are not capitalized.

Example: The building owner has a leaky roof. The old roof is removed and replaced with a comparable roof in order to fix the leaks. Removal costs are not capitalized.

  • Removal costs incurred as a result of an elective partial disposition are capitalized in the event there is a restoration or improvement made.

Example: The building owner has a leaky roof. The old roof is removed and replaced with a new roof. The taxpayer elects to record a partial disposition on the roof. After all, he no longer is in possession of two roofs. Removal costs are capitalized to the cost of the new roof.

 

 



[1] My basic reference is 26 CFR 1.263(a)-3 Amounts paid to improve tangible property, (g) (2), Removal costs.