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An amount qualifies as
include an election statement with its tax return.
All taxpayers are provided with an election under
maintenance costs. Generally, a taxpayer making routine maintenance
Regs. Sec. 1.263(a)-3(n) to capitalize repair and
this election treats otherwise deductible repairs as
capital improvements to tangible property to the on tangible personal
extent they are treated as capital expenditures for
book purposes (this may be referred to as “follow-
ing books”). This election is also made by filing property if the taxpayer
an election statement with a timely filed federal
expects to perform the
income tax return.
Dispositions
Dispositions of depreciable property subject maintenance more than
to the modified accelerated cost recovery sys-
1.168(i)-1 and -8. The regulations provide rules for once during the class life
tem (MACRS) are covered under Regs. Secs.
determining the asset disposed of and the basis of
the asset disposed of, including when the asset is of the property.
in a multiple asset account or is a partial disposi-
tion of an asset. The final regulations include
examples of reasonable methods for determining
basis disposed of in partial dispositions and clarify
that improvements and additions are separate could have a meaningful effect on certain taxpay-
assets from the underlying property improved for ers. Some additional possible reasons to consider
this purpose. reengaging with the tangible property regulations
Generally, the partial-disposition rule is elec- include utilized or expired net operating losses
tive; however, taxpayers are required to apply this (NOLs), large renovation projects to owned or
rule in certain instances, which include casualty leased buildings, and changes to book account-
losses under Sec. 165, dispositions resulting in ing policies.
nonrecognition treatment under Sec. 1031 or
1033, a transfer of a portion of an asset in a “step- Sec. 163(j) interest limitations
in-the-shoes” transaction described in Sec. 168(i) The law known as the Tax Cuts and Jobs Act
(7)(B), and the sale of a portion of an asset. The (TCJA), P.L. 115-97, limited the amount of
partial-disposition election is made on a timely interest expense that a taxpayer may deduct
filed tax return for the year in which the disposi- each year. Under Sec. 163(j)(1), the limitation is
tion occurred. If a taxpayer does not make the generally the sum of business interest income,
election, the property continues to be depreciated 30% of adjusted taxable income (ATI), and floor
until the taxpayer disposes of the entire asset. plan financing interest for the tax year. For many
taxpayers, the ATI component may be the largest
SO WHY NOW? portion of the computation. Sec. 163(j)(8) and
Why would taxpayers want to revisit the tangible Regs. Sec. 1.163(j)-1(b)(1) require certain adjust-
property regulations now? The rules are not ments to ATI, including adding back depreciation
new this year (and therefore are not a “required” expense under Secs. 167 and 168 and subtracting
change), and taxpayers may be following a routine the greater of the allowed or allowable depre-
with respect to maintaining the tax methods and ciation (as provided under Sec. 1016(a)(2)) of
elections chosen in prior years. Some taxpayers property that is sold or disposed of. Each of these
may have affirmatively made certain planning adjustments applies only to tax years beginning
decisions in response to tax law changes (a couple before Jan. 1, 2022.
will be discussed below) and may now need to For tax years beginning in 2018 through 2021,
reconsider those choices, as the tax laws are again taxpayers may have seen a beneficial impact to
changing. As noted above, the tangible property their Sec. 163(j) interest limitation by electing to
regulations have several optional elections that capitalize amounts that are otherwise deductible

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