The IRS recently issued taxpayer-friendly guidance regarding the disposition of a component of real or personal property.
Under the Internal Revenue Code, taxpayers are required to capitalize certain amounts paid to acquire, produce or improve real or tangible personal property during the year and that is used for a trade, business or for the production of income. However, prior to the issuance of new regulations in 2013 taxpayers were unable to write-off the remaining cost of a component of a larger asset or building that was repaired or replaced (e.g. a roof). In fact, under the old rules, it was not uncommon for business owners to be required to depreciate “ghost assets” – assets that were removed or replaced by the taxpayer and are no longer in service.
The good news is that the IRS has changed its mind on these, so-called, “partial dispositions.”
So, What’s Changing?
Beginning Jan. 1, 2014, taxpayers were able to deduct the remaining cost of such components in the year they were replaced/repaired by making an election on their tax return.
Additionally, the IRS allowed taxpayers to apply the regulations to dispositions that had already happened in prior years as long as the ghost assets were still being depreciated.
What was unclear until recently was how a taxpayer could effectively make the election on a retroactive basis given that businesses were required to file their 2013 year tax returns before the IRS had issued definitive guidance.
The IRS’ Response
The IRS officially announced a specific revenue procedure that provides a limited opportunity for taxpayers to write-off assets that were disposed of during a prior year. The guidance outlines the procedures necessary for taxpayers to secure the write-off, as well as what documents they should include when filing their request. If you do plan to write off a ghost asset from a previous year, you must make plans do so now as this retroactive election opportunity is time sensitive. Taxpayers who miss this opportunity will be required to continue depreciating these ghost assets. For some, this means that you could be depreciating ghost assets for another 15-20 years.
Are you a business owner who is still paying the IRS for assets that you no longer have or that have been replaced? Do you want to learn more about the IRS’s new rules on ghost assets and how they can impact your business? Email Rea & Associates to find out if you can write off ghost assets that continue to haunt your business.
Author: Chris Axene, CPA (Dublin office)