By: Donald Archer
Recently we have performed a number of cost segregation studies on remodeling/renovation projects. Among the questions that have arisen in reconciling the cost of the renovation are those related to the disposition of the cost of assets that have been removed and those remaining from the previous facility. For the most part, we have ignored the cost of the existing building and improvements resulting in their remaining on the client’s books even though some of the assets have been demolished. The recent release of the Temporary Regulations under 263(a) has changed the manner in which the residual basis of existing assets is handled following removal on a remodeling project.
In the past, demolished assets had to be carried on the client’s books until the full cost had been recovered and ultimately retired. Now, however, the value of the removed assets can be written off as abandoned components (Note: This only applies to 39-year real property). Not only does this regulation take effect immediately, but an owner can also write off removed components from remodeling projects performed during the past ten years by filing a Form 3115 (Change in Accounting Method).
By having an engineer or other qualified professional identify, quantify and estimate the cost of the removed 39-year property, the owner can realize an additional write-off equal to the value of the abandoned assets less the accumulated depreciation of those components. The result is an additional write-off in the year incurred and the retirement of the disposed assets.
An obvious obstacle to claiming this allowance is determining the cost of the removed components. Unless the cost of the individual components was known prior to the renovations, calculating their cost can be an arduous task. In the course of calculating individual asset values for cost segregation studies, we have had to calculate the value of demolitions and removals of a variety of components when reconciling the cost of a project. This application is readily adaptable to determining the cost of removed components for abandonment purposes.
In order to perform an estimate of the removed assets, the engineer should have access to the construction drawings including a set of the demolition plans, the most recent depreciation schedules of the facility and the contractor’s final pay application. The resulting asset disposition should provide a list of the components removed, their estimated cost, the accumulated depreciation of each as of the date of construction and the net asset cost to be abandoned.