Time Is Running Out to Claim Partial Disposition Losses

Do you own or lease a building?

Have you made improvements or repairs to that building in the past 10 years?

If you answered yes to both of those questions, you still have time to claim partial disposition losses thanks to new tangible property regulations (TPR) that allow you to make a retroactive partial disposition election for years before 2014 through filing Form 3115 to request a change in accounting method.

The process to claim a partial disposition of an asset is straightforward and easier than you might think. If you’re still unsure how TPR might apply to you, we have a trove of related Insight articles you can explore. Here’s a quick recap: A TPR analysis for repairs and improvements now looks at the building structure and nine building systems separately (as opposed to looking at the building as a whole) and applies a set of principles to determine if an amount expended should be a capitalized improvement or a deductible repair.

The process:

  • Confirm that the amount expended needs to be capitalized
  • If properly capitalized, then recognize a gain or loss on the partial disposition

The partial disposition element of the regulations, which is one of the major differences and considered one of the more favorable provisions, allows you to claim a loss upon disposition of a building component. Previously, this event wouldn’t have been recognized because the underlying asset was still in service. Generally though, a repair expense will result in a greater benefit than a partial disposition so it’s important to first determine if the amount expended requires capitalization.

Following are some keywords related to your business that will help you determine whether or not you could benefit from claiming partial disposition losses. In addition to words that would indicate an addition of a new building component, such as walls, floors, partitions, ceilings, rooftop, windows, and doors (generally meaning that an “old” component was disposed), here are some other words that may highlight a possible improvement or repair:

  • Addition
  • Fix
  • Improve
  • Remodel
  • Renovate
  • Replace
  • Repair
  • Restore
  • Rewire
  • Update
  • Upgrade

If you’ve applied for an extension, you have until the extended due date of your return to explore potential benefits. Before filing Form 3115 with your 2014 tax return, it’s worth your time to understand if you might be able to reap additional savings through TPR. It doesn’t matter if you had prior year losses or aren’t currently profitable. If you foresee profitability in the future, this may be your last opportunity to take a retroactive look at your improvements and repairs, even if it does increase your loss carry forward.

We’ve seen the first wave of tax filings related to TPR and the numbers are impressive. Our clients across multiple industries, such as health care, multifamily complexes, automotive dealerships, real estate, and retail, have claimed anywhere from a $100,000 benefit to $10 million. We often find opportunities when a client asks us to look into it, whether it’s a repair, asset reclassification, or partial disposition benefit. Have you taken advantage of what TPR has to offer?

We're Here to Help

Now is the time to evaluate how the retroactive partial disposition election could benefit you or your business. While it might seem like a daunting task, our professionals can prepare the results of a TPR analysis in a timely manner with little disruption to your organization. We can also help you analyze your current practices versus TPR, assist with complex computations, and make recommendations for future opportunities and compliance. If you have questions about making a retroactive partial disposition election or the new tangible property regulations, contact your Moss Adams professional.