Jason Thompson: Ease Your Tax Burden

There are two takeaways when discussing new tangible property regulations.
Jason Thompson Moss Adams

Jason Thompson Moss Adams

There are two takeaways when discussing new tangible property regulations (TPR): You may be able to ease your tax burden by claiming partial disposition losses, and time is of the essence with a deadline looming of Sept. 15 for many firms, or until a firm’s extension filing date, whichever is applicable. Check with your advisors. Firms have saved thousands of dollars, and some in the millions.

So, let’s get to it. 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 through the new regulations, which allows 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, 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.

The numbers we’ve seen so far from tax filings related to TPR are impressive. Our clients across multiple industries, such as healthcare, multi-family complexes, automotive dealerships, real estate, and retail, have claimed from thousands of dollars, into the millions. With the potential for this kind of outcome, it warrants some digging to see if you qualify to take advantage of what TPR has to offer.

Seattle-based Jason Thompson, CPA, provides federal and state taxation services to a variety of individual and business clients with particular emphasis on clients who own, operate, invest, and manage all types of real estate assets. He can be reached at (425) 317-3051 or jason.thompson@mossadams.com