Pit & Quarry, June 2013

BUSINESS talization rather than deduction in close situations For example previous rules treated buildings as a single unit of property so that replacement of a structural component such as a roof was not a substantial modification and thus could be deducted Under the new rules however primary components of a building structure or a specifically defined building system must be treated separately so that replacement of those components must be capitalized Some changes are more taxpayer friendly For example if the cost of an improvement is capitalized it must be depreciated as a new asset and recovered over the life of the improved property The old rules did not permit an aggregates mining operation to recognize losses upon the retirement of the old property following an improvement which resulted in simultaneously depreciating multiple portions of the same property The new regulations address this problem by expanding the definition of a disposition to include retirements of structural components of a building Retiring structural components Earlier versions of the proposed regulations treated each building and all of its structural components as a single unit of property Building systems such as HVAC plumbing electrical fire protection alarm and security systems were not treated as separate units of property Now the building structure for example the building shell and all other structural components that are not part of the building system are treated as separate units of property Thus retirement of a structural component on a building is now treated as a disposition that results in a loss deduction equal to the adjusted depreciable basis A disposition of property formerly depreciated under MACRS occurs when ownership of the asset is transferred or when the asset is permanently withdrawn from use In addition to treating each structural component of a building or an entire unit Unfinished business When the IRS revised the new temporary repair regulations late in 2012 they indicated that certain sections may be revised in a manner that might affect and in certain cases simplify taxpayers implementation of the rules when the regulations are issued in final form The Internal Revenue Service IRS says that the following sections are among those likely to be revised De Minimis Rule Dispositions under the MACRS general asset account rules and item and multiple asset account rules and Safe Harbor for Routine Maintenance According to the IRS the revisions being contemplated will take into consideration all of the comments they received requesting relief for small businesses In addition to staying tuned for these revisions the sheer volume of the new 255 page regulations on deduction versus capitalization of tangible property costs makes professional assistance a necessity The Jan 1 2014 effective date makes now a good time to seek such help and also a good time to begin looking at the repair and maintenance costs of your sand gravel or crushed stone business of Section 1245 property as the asset disposed of a sand gravel or crushed stone operation can use any reasonable and consistent method to treat components of a structural component and in most cases components of a unit of Section 1245 property as the asset disposed of An aggregates business that previously retired a structural component which is currently being depreciated will now be required to change accounting methods to bring the treatment into compliance with the new rules In general that means recognize a loss upon the disposition of a portion of a structural component Accounting rule changes Although the repair regulations dont kick in until after Jan 1 2014 or at the quarry sand or gravel plant or producers option for tax years beginning on or after Jan 1 2012 implementation will require an aggregates business to file a change of accounting method where an existing accounting method conflicts with a method of accounting required or authorized under the repair regulations Often the change will not be applied on a cutoff basis thereby requiring the computation of a Code Section 48 a adjustment that may or may not be taxpayer favorable depending on the specific change One example provided by the IRS is a situation where a taxpayer previously claimed a repair expense that should be capitalized In such a situation the taxpayer will according to the IRS need to file an accounting method change that capitalizes the previously declared expense and report a Code Sec 48 a adjustment in income equal to the previously claimed on the repair through the year of change Conversely a previously capitalized repair may be deductible under the temporary regulations and a taxpayer should file an accounting method change that results in a favorable adjustment equal to the capitalized amount as reduced by any depreciation claimed The IRS originally issued the early rules to provide automatic accounting method changes relating to the temporary regulations The IRS says these procedures may continue to be used by taxpayers that optionally apply the temporary regulations to tax years beginning on or after Jan 1 2012 They will issue new automatic accounting method change procedures for taxpayers who apply the final regulations to tax years beginning on or after Jan 1 2012 P Q Mark E Battersby is a freelance writer who has specialized in taxes and finance for the last 25 years 50 PIT QUARRY June 2013 www pitandquarry com