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Treatment of Tangible Property Under MACRS

09.11.2014

Depreciation money jarThe IRS has finalized its regulations on the treatment of dispositions of tangible property under the Modified Accelerated Cost Recovery System (MACRS) and Code Sec. 168. The final regulations clarify how taxpayers should identify which assets are subject to the rules, how to compute gain and loss from dispositions of assets (particularly in the context of general asset accounts), and how to approach partial dispositions of tangible property. The final regulations apply to tax years beginning on or after January 1, 2014. A taxpayer may, however, choose to apply the final regulations to tax years beginning on or after January 1, 2012.

Final regulations

In general, the final regulations track the proposed regulations, which the IRS issued in 2013. For example, the final regulations retain the definition of a disposition from the proposed reliance regulations. If a partial disposition election is made, the retirement of a component of an asset is considered a disposition, allowing the taxpayer to write off the cost of the component.

If it is impractical for a taxpayer to determine the basis of the disposed asset from its records, the taxpayer may apply any reasonable method to make this determination. However, a taxpayer cannot determine basis by discounting the cost of a replacement asset that is a betterment or an adaptation to a new or different use, to determine the original basis of a replaced asset.

The final regulations also clarify but make no significant changes to the general asset account (GAA) regulations. If a taxpayer elects GAA treatment, it can continue to depreciate the assets in the account, rather than track and account for the separate assets disposed of, the IRS explained. A taxpayer generally may elect to terminate GAA treatment if the taxpayer disposes of the asset in a qualifying disposition or if the taxpayer disposes of the last item in the GAA.

Haggerty_Rob (2)For more information, please contact your Brown Smith Wallace Tax Advisor, or Rob Haggerty at 314.983.1311 or rhaggerty@bswllc.com.

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