Long-term tax benefits of the partial disposition election.

• Author: McGuire, Jonathan

The introduction of the tangible property regulations, or the "repair regs.," is one of the most fundamental tax law changes since the 1986 Code went into effect. Many practitioners have gone through a crash course of information overload trying to comprehend the new capitalization standards, determine what are materials and supplies, etc. An area of the new regulations that, operationally, remains largely unchanged from prior law is that regarding dispositions, with the exception of the new partial asset disposition election. This part of the regulations has largely been ignored or underappreciated by practitioners. Yet the partial asset disposition election might be one of the most, if not the most, beneficial tools for many clients in year-end tax planning.

Regs. Sec. 1.168(i)-8(d)(2) allows a taxpayer to elect to dispose of a portion of an asset for certain disposition transactions that include retirement of the portion. The taxpayer must make the election by the due date, including extensions, in the year in which the portion of an asset is disposed. There is no requirement to attach a statement with the return on which the election is made. The taxpayer simply needs to record the disposition as such. The taxpayer then may recognize any gain or loss upon the disposal of the portion of the asset. Generally, a partial asset disposition will result in an ordinary loss. This disposal accelerates depreciation via the abandonment of adjusted basis that otherwise would have had to be recognized over the remaining years of the asset's depreciable life.

Tax Rate Arbitrage on Sale of Asset

Many practitioners, however, are ignoring this valuable election for one or more of the following reasons:

* Determining the adjusted basis is too complex;

* The asset will be fully depreciated in the next few years; or

* The gain or loss is not worth the time and effort to figure.

Many taxpayers are failing to look at the long-term benefit that results from making a partial asset disposition election. Even if the current-year write-off is minimal in tax savings, taxpayers can, upon the sale of the asset, save thousands of dollars in taxes. By making a partial asset disposition election, the taxpayer not only writes off the remaining depreciable basis of that portion of the asset; it also writes off future Sec. 1245 or 1250 gain, depending on the asset type, because the asset's accumulated depreciation is also reduced by the amount of accumulated depreciation...