TPR Tax Consulting Services
We assist clients and CPA’s with the Tangible Property Regulations (TPR) by reviewing project information and determine whether they should be capitalized or expensed. If capitalized, we also provide the partial asset disposition calculations. We are experts in understanding and calculating partial asset dispositions. We provide audit and inquiry protection for these services. Contact Us for a Complimentary Consultation in Calculating Partial Asset Dispositions.
FREE Partial Asset Disposition Calculations… for as long as you own the building,
when the property owner completes a Cost Segregation Study through Carrara Business Services. We have national coverage in that we can do a Cost Segregation Study on any building in the US.
How to Calculate Partial Dispositions
Calculating Partial Asset Dispositions is a process you will be going through every year. The Depreciation Schedule is now a Balance Sheet whereby you are adding and subtracting building components every year.
Step 1 – Contractor Invoice
The contractor needs to breakout the costs into 3 categories:
A) Cost to remove/dispose old building component
B) Cost/labor to install new building component
C) Material Cost of new building components.
The Cost to remove/discard building components is Expensed and does not enter into the calculation of Basis Value of the Disposed Asset. If you don’t have an itemized invoice, request one from the Contractor.
Step 2 – Determining Asset Basis Value
The IRS Approved 3 Methodologies within the Tangible Property Regulations to determine the Basis Value of the Disposed Asset.
Asset Basis Value – Method #1 (Only Restoration)
“Discounting the cost of the replacement asset to its placed-in-service year cost using Producer Price Index for Finished Goods (or Final Demand) where the replacement asset is a “Restoration” and is NOT a “Betterment or is NOT an “Adaptation” to a new or different use.” IRS Reg
Discussion: CPI is NOT permitted.
- You need to go through the BAR test to ensure it is Restoration in order to use this methodology.
- PPI cannot be used when numerous building systems are included. See Methodology 2 and 3.
- You may want to consider a PPI for the “material” and PPI for “labor” if you have all the costs broken out.
- You cannot use PPI Method if the costs are NOT itemized as described above.
- You may also need to apply a “Condition Factor” to that item that is part of a building that was “purchased”. Example: You purchased a building in 2005. In 2015, you replaced a rooftop AC unit. Well, rooftop AC units have 15 year expected life.
2005 Basis Value = PPI @ 2005 x Replace Cost x Condition Factor
PPI @ 2015
If you need assistance calculating Partial Dispositions using the PPI method for Restorations,
Contact us for an initial complimentary consultation.
Asset Basis Value – Method #2 (BAR)
“Pro Rata allocation of the unadjusted depreciable basis of the multiple asset account based on the replacement cost of the disposed asset and the replacement cost of all of the assets in the multiple asset account.” IRS Reg
Discussion: In order to use this methodology you need to have a Cost Segregation Study completed first. A Cost Segregation Study segregates all the costs into all the building systems and various components.
- This is used when multiple building systems are disposed of in a betterment or adaptation and in some cases a restoration to the building.
- If you have a Cost Segregation Study completed, this methodology can be utilized at anytime in the future. This is why many commercial property owners are getting a Cost Segregation Study completed in addition to use it for the “Significance Test” to determine expense vs. capitalization.
A Cost Segregation Study not only provides immediate cash flow tax benefits but also useful in the future for Partial Dispositions. Contact us for a Free Preliminary Analysis.
Asset Basis Value – Method #3 (BAR)
“Study allocating the cost of the asset to its individual components.” IRS Reg
Discussion: See IRS Cost Segregation Audit Technique Guide.
- This is an Engineering Study under the rules of IRS Cost Segregation Audit Technique Guide.
- CSSI can perform the Engineering Study specific to a Disposed Asset or in combination with a Cost Segregation Study. Most property owners will do both at the same time because a Cost Segregation Study can be used for Method #2 and for the “Significance Test” to determine expense vs. capitalization.
A Cost Segregation Study not only provides immediate cash flow tax benefits but also useful in the future for Partial Dispositions. Contact us for a Free Preliminary Analysis.
Step 3 – Determining the Partial Asset Disposition / “Write-offs”
- After you have determined the “Component Asset Basis Value”, the Total Value will be reduced by the “Component Asset Basis Value”. This will be deducted from appropriate category on the depreciation schedule.
- Any remaining depreciation of that item or building component will also be written off.
Write-off = “Asset Basis Value” – “Accum. Depreciation Pro-rata” - For the Tax Year 2015 and going forward, you file Form 4797 to apply the disposition for that tax year.
Even if that “non-existent” asset has been fully depreciated, take the building component off the depreciation schedule as the client will not have to pay “Depreciation Recapture” when they go to sell the building. This is a HUGE benefit to the client. Contact us for an initial complimentary consultation if you have any questions.
