The IRS issued a revenue procedure (Rev. Proc. 2014-17) on Feb. 28 that provides taxpayers with rules for filing method changes for dispositions of tangible depreciable property. The revenue procedure is the companion to the recently released revenue procedure (Rev. Proc. 2014-16) for filing method changes under certain provisions of the final “repair regulations.” (For a discussion of Rev. Proc. 2014-16, see Tax Flash 2014-01.)
The repair regulations are final regulations released in September 2013 (TD 9636) regarding when costs incurred to acquire, produce or improve tangible property must be capitalized or may be deducted. (For a discussion of the regulations, see Tax Flash 2013-13.) At the same time, reproposed regulations were released regarding when costs can be recovered upon the disposition, including a partial disposition, of depreciable property. The final regulations are effective for taxable years beginning on or after Jan. 1, 2014, but may be early adopted for years beginning on or after Jan. 1, 2012. Similarly, the reproposed regulations, when finalized, are effective for taxable years beginning on or after Jan. 1, 2014, but may be applied to years beginning on or after Jan. 1, 2012.
The revenue procedure supersedes Rev. Proc. 2012-20, which provided automatic method change procedures for complying with provisions of the 2011 temporary repair regulations. Because the reproposed regulations can be applied only to taxable years beginning on or after Jan. 1, 2012, and beginning before Jan. 1, 2014, the revenue procedure applies only to method changes for those taxable years. When the reproposed regulations are finalized, a new revenue procedure will be issued that will supersede Rev. Proc. 2014-17 and will provide the rules for making changes under the final regulations. The reproposed regulations are expected to be finalized within the next several months.
New method changes in general
The revenue procedure updates the comprehensive list of automatic method changes in Rev. Proc. 2011-14 by adding several new method changes. In general, the changes in method of accounting relate to asset grouping rules and disposition rules under the temporary and reproposed regulations. The specific changes allowed are listed in the revenue procedure and are each assigned a different automatic change number. Additionally, specific information related to each method change is provided. Similar to Rev. Proc. 2014-16, there are simplified filing rules for small taxpayers (average annual gross receipts for the three preceding taxable years of $10 million or less).
The method changes are generally made using a Section 481(a) adjustment. Certain scope limitations are waived for method changes under the revenue procedure, which generally means taxpayers may file the automatic method changes even though they are under IRS exam or have recently filed the same type of method change.
One of the most significant changes under the reproposed regulations is the ability to recover basis upon the partial disposition of property.
Limited time to make late partial disposition election
One of the most significant changes under the reproposed regulations is the ability to recover basis upon the partial disposition of property, such as the disposal of a component of a building during a renovation. The regulations provide that the loss upon disposition is allowed if an election is made on a timely filed return for the year of disposition. The revenue procedure, however, includes an important exception to this rule and allows a late partial disposition election to be made for dispositions in prior taxable years. The revenue procedure treats the late partial disposition as a method change, and the Section 481(a) adjustment for this change could be very significant for taxpayers.
Taxpayers, however, have only a limited time to take advantage of this potential significant cash flow opportunity. The revenue procedure allows this change to be made only for years beginning on or after Jan. 1, 2012, and beginning before Jan. 1, 2014 (the effective date of the reproposed regulations), with transitional rules for certain returns that have been previously filed. The revenue procedure that will be issued after the reproposed regulations are finalized may extend this period for an additional year, but that is not clear at this time.
Limited time to revoke late general asset account election
Some taxpayers that made a late general asset account election for assets under Rev. Proc. 2012-20 may want to revoke that election. The revenue procedure allows the revocation to be made by a method change with special Section 481(a) rules. Taxpayers also have a limited opportunity to make this election for years beginning on or after Jan. 1, 2012, and beginning before Jan. 1, 2015.
The revenue procedure is effective as of Feb. 28, 2014.
Taxpayers will want to determine how the new rules may affect their current methods of grouping assets and recovery of basis upon disposition of property. They will also want to determine the timing for making automatic method changes under the revenue procedure, to comply with the rules and take advantage of the limited period to file method changes for making late partial disposition elections and revoking late general asset account elections. Grant Thornton will host a webcast on March 20 to cover the most important aspects of Rev. Proc. 2014-16 and Rev. Proc. 2014-17, including the method changes you need to make and the method changes you can make to take advantage of potentially significant cash flow opportunities.
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