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February 24, 2024 | read

Deducting the Costs of a Partial Disposition

Brandon Hall

Deducting the Costs of a Partial Disposition

While deducting disposal costs relates to deducting the cost when an entire component or Unit of Property (UOP) is replaced, partial dispositions of assets allow for significant tax deductions as well.

IRS Regs. Sec. 1.168(i)-8(f)(3) explains 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 of 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 of 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 the historical cost of a replaced asset. Applying the PPI can be difficult, as shown in the example below.

Making the Election

IRS Regs. Sec. 1.168(i)-8(d)(2)(ii)(A) says that 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. IRS Regs. Sec. 1.168(i)-8(d)(2)(ii)(B) says that to make the election, a taxpayer reports the gain, loss, or other deduction on the taxpayer’s timely filed original return for the year the partial disposition is made and classifies 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.

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