On February 28, 2014, the IRS released Rev. Proc. 2014-17, which pertains to accounting method changes under the temporary and proposed regulations for dispositions, general asset accounting and a few other miscellaneous provisions. We will specifically address dispositions in this communication. The Rev. Proc. is effective as of the day it was issued and supersedes Rev. Proc. 2012-20. Moving forward, any Form 3115 filed after February 28, 2014 must abide by the rules as set forth in this new Rev. Proc. The focus of the Rev. Proc. pertains to the treatment of assets currently on the taxpayer’s books that were physically disposed of in prior years. For example, 15 roof top air conditioning units on the depreciation schedule when 10 are actually on the roof – all being capitalized and depreciated.
The new Rev. Proc. allows taxpayers to change their method of accounting from depreciating disposed assets, to recognizing the gain or loss on disposition. Here are some important key facts to remember:
- This change is limited to tax years beginning after January 1, 2012 and before January 1, 2014. Taxpayers would be using the guidance under the temporary regulations. From a practical standpoint, the window of opportunity has closed for 2012 returns. The best option is to do this on 2013 tax returns.
- The second part of this election (if not done correctly or not done at all),could reverse all of the deductions taken for disposition of assets. Consequently, if taxpayers take this election on their 2013 tax return they must also file a Form 3115 fortheir 2014 tax return and do a Late Partial Disposition election (a concept introduced in the new Rev. Proc.).
- For those taxpayers using the proposed regulations after January 1, 2014, the second Form 3115 is required. The scope limitation (5-year rule) has been waived for this instance.This Rev. Proc. also modifies Section 6.30 of Rev. Proc. 2011-14 to allow for a similar treatment as mentioned above, but for § 1245 assets and land improvements.
- The IRS gives small taxpayers reduced filing requirements but no change in the timing and no additional advantage in doing the calculations necessary to back up the § 481(a) adjustment. The § 481(a) adjustment must be taken in one year but can include all assets for which taxpayers are making the above election on a single Form 3115 and with a single § 481(a) adjustment.
For those taxpayers who have chosen to extend their 2013 returns, this Rev. Proc. is welcome news. Bedford’s ReCap report may be just the analysis required to enable taxpayers to make the appropriate corrections to their fixed asset schedules and receive potentially rewarding tax benefits.