While the opportunity to file a late partial disposition election ended for calendar year taxpayers, fiscal year-end taxpayers still have time to review depreciation schedules for these missed deductions. In the context of a building, a late partial disposition occurs generally when any building component, such as a roof, has been removed in a prior tax year. Current rules allow taxpayers to file an “automatic” Form 3115 to claim these losses only through the 2014 tax year.
KBKG Insight: The Tangible Property Regulations are effective for tax years beginning on or after January 1st, 2014. So a corporate taxpayer with a fiscal year ending on September 30, 2015 has until their extended due date of June 15, 2016 to claim late partial dispositions.
Fiscal year-end taxpayers should consider reviewing their depreciation schedules to identify disposed building components and filing Form 3115, Method of Change in Accounting, change No. 196, to claim losses.
Case Study: Company A, a FYE taxpayer, acquired and placed into service a building in 2005 and depreciated the building over 39 years. In 2011, Company A replaced all the building’s windows. Company A capitalized the cost of the new windows but continued to depreciate the old windows. Company A can file a late partial disposition election in the tax year beginning on or after 1/1/2014 tax year to claim a loss on the retirement of the old windows equal to their undepreciated basis.
Quantifying the original tax basis of depreciated components can be done by hiring a cost segregation professional or by applying a discounting approach using the Producer Price Index (PPI) while adjusting for the condition of each component at the time acquired.
Author: John Hanning | Co-Authors: Gian Pazzia, Alex Bagne
KBKG’s online Component Disposition Calculator simplifies the PPI discounting approach for tax preparers when a cost segregation study is not necessary.