Have you previously removed or replaced any structural components of your building(s) such as a roof, HVAC equipment, doors, windows, etc.?
If you, or your clients have, there are substantial benefits to conducting an Asset Retirement Study.
On December 23, 2011 the IRS and Treasury Department released the long awaited Temporary Regulations for Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property.
“The regulations revise the definition of Disposition for property subject to section 168 to include the retirement of a structural component of a building.”
“This change allows a taxpayer to recognize a loss on the disposition of a structural component of a building before the disposition of the entire building, so that a taxpayer will not have to continue to depreciate amounts allocable to structural components that are no longer in service. Thus, under the temporary regulations, a taxpayer is not required to capitalize and depreciate simultaneously amounts paid for both the removed and the replacement properties.”
If you, or your clients are still carrying the retired “Ghost” assets on the depreciation schedule, the opportunity to write off those assets and realize a tax benefit for those assets is available now. (See Example at the bottom of the page.)
The problem: How to determine or break-out the cost of the disposed asset.
At M&E Cost Segregation we determine specific asset costs on a daily basis. While performing our engineering based cost segregation services, we assign costs to every component of a building. An Asset Retirement Study is a limited scope in engagement in which we are applying engineering & costing methodologies to one or several large assets.
We will provide a No Cost, No Obligation, Asset Evaluation that will show an estimated range of benefit and our flat fee to conduct the study. This provides the opportunity to make an educated decision before moving forward with the study.
Furthermore, we will defend our findings at no charge to the client.
Contact Us today to get additional information or to start the evaluation process.
Example 1. A owns an industrial building with a 100,000 square foot roof that was replaced in June 2010. The retirement of the replaced roof, which is a structural component of the building, is a disposition. M&E is hired to conduct an Asset Retirement Study for the owner. It is determined that the value of the roof when the owner purchased the property in November 2000 was $709,384. Using the 39-year straight-line depreciation method along with the applicable convention it is determined that the adjusted basis in the roof at the time of disposition was $533,553. Building owner A can write-off the disposition of the retired roof, by filing a Form 3115 Change In Accounting Method, and recognize a loss in the current year in the amount of $533,553.
Example 2. On June 1, 2009, B, purchased and placed in service a $25,000,000 office building that was constructed in 2000. On March 15, 2012 owner B replaced four of the twelve HVAC rooftop units. The assets were not separately stated and the building was accounted for as a single asset with a cost of $25,000,000. The property was depreciated as non-residential real property and used the straight-line method of depreciation with a 39-year recovery period. Because B cannot identify the cost of the structural components of the office building from its records, it hires M&E to determine the costs of the HVAC units. It is determined that at the time of purchase the HVAC units were each worth $267,000. Using the straight-line 39-year depreciation method and mid-month convention, B was able to recognize a loss in the current year of $991,551.
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