Application of partial asset dispositions and the de minimis safe harbor.

• Author: Siddiqui, Muhammad Y.

The initial adoption of the tangible property regulations has now passed, and practitioners have implemented them for clients. Two important matters that practitioners should continue to monitor are partial asset dispositions and de minimis safe-harbor elections. The partial-asset-disposition election may provide taxpayers with significant tax deductions. The de minimis safe-harbor election allows taxpayers to use the increased deduction thresholds for the purchase or improvement of tangible property.

Partial Asset Disposition

According to Regs. Sec. 1.168(i)-8(d)(2)(ii)(A), a partial-asset-disposal election must be made by the due date (including extensions) of the original federal tax return for the year in which the taxpayer disposes of the portion of the asset. Regs. Sec. 1.168(i)-8(d)(2)(ii) (B) explains the manner of making the election is by reporting the gain, loss, or other deduction on the taxpayer's timely filed original return for the year the partial disposition is made and by classifying the replacement portion of the asset under the same asset class as the disposed portion of the asset in the year the replacement asset is placed in service by the taxpayer. Under Regs. Sec. 1.168(i)-8(d), the taxpayer must classify the replacement asset(s) in the same asset class of which the replaced part is a component: modified accelerated cost recovery system (MACRS) asset classes 00.11 through 00.4 of Rev. Proc. 87-56.

Regs. Sec. 1.168(i)-8(f)(3) clarifies that if it is impractical to determine the unadjusted depreciable basis from the taxpayer's records, a reasonable method may be used to determine the unadjusted depreciable basis of the disposed portion, including the following:

1. The producer price index (PPI) for finished goods or final demand: discounting the cost of the replacement asset to its placed-in-service year cost using the PPI for finished goods or final demand.

2. A pro rata allocation of the unadjusted depreciable basis of the asset based on the replacement cost of the disposed portion of the asset and the replacement cost of the asset.

3. A cost-segregation study.

A taxpayer can use the PPI only if the replacement is a restoration; also, the consumer price index is no longer a reasonable method to calculate historical cost of a replaced asset. Applying the PPI can be difficult, as shown in the example below.

Example: Taxpayer purchases a $150,000 air conditioner in June 2015. Taxpayer owns a building with an original...