New Tangible Property Regulations
The IRS recently issued new Regulations (TD 9564) on how to treat amounts paid to acquire, produce, or improve tangible property which also incorporates the unit of property (UoP)concept.
Under the UoP concept, numerous structural components in 9 categories are treated as separate units instead just a part of the building. For example, previous rules required continued depreciation of the existing roof, and capitalization of the new roof, essentially double depreciating.
The new regulations allow taxpayers to take retirement losses for components removed or abandoned (i.e. the old roof) in a renovation, but with a catch.
The catch is these components must have separate capitalization costs on the fixed asset ledger prior to expiration of the safe harbor dates, not just lumped sum entries called Building.
The solution is to create breakdowns of building components to establish basis for future write-off when replaced under TD 9564 and Reg. 168745-03 effective as of an elected effective date of January 1, 2014 per IRS Notice 2012-73 released November 20, 2012.
This approach is best implemented for past and current capital projects by using appraisal engineering-based methodology to create supportable building component cost breakdowns by a 3rd party expert.
If you would like to discuss this further with us or wish us to refer you to an engineering firm capable of conducting such a study, please call your LLG contact.