General Asset Accounts

Words you may need to know (see Glossary):

• Amount realized
• Clean-fuel vehicle
• Clean-fuel vehicle refueling property
• Unadjusted depreciable basis

To make it easier to figure MACRS depreciation, you can group separate properties into one or more general asset accounts. You can then depreciate all the properties in each account as a single item of property. Each account can include only property with similar characteristics, such as asset class and recovery period. Some property cannot be included in a general asset account. There are additional rules for passenger automobiles, disposing of property, converting property to personal use, and property that generates foreign source income.

After you have set up a general asset account, you generally figure the depreciation for each account by using the depreciation method, recovery period, and convention that applies to the property in the account. For each general asset account, record the depreciation allowance in a separate depreciation reserve account.

Passenger automobiles. To figure depreciation on passenger automobiles in a general asset account, apply the deduction limits discussed later in chapter 4. Multiply the amounts determined using these limits by the number of automobiles originally included in the account reduced by the total number of automobiles disposed of (or changed to personal use) during the year and any previous year in any of the following types of transactions. These are discussed later under Dispositions and Conversions.

• Qualifying dispositions.
• Nonrecognition transactions.
• Abusive transactions.
• Dispositions leading to the recapture of certain credits and deductions.

Property you cannot include. You cannot include property in a general asset account if you use it in both a trade or business (or for the production of income) and in a personal activity in the year in which you first place it in service.

Property generating foreign source income. For information on the general asset account treatment of property that generates foreign source income, see section 1.168(i)-1(f) of the regulations. You can read the regulations at many public libraries and IRS offices.

How To Group Property in a General Asset Account

Each general asset account must include only property that you placed in service in the same year and that has the following in common.

• Asset class.
• Recovery period.
• Depreciation method.
• Convention.

The following rules also apply when you establish a general asset account.

• No asset class. Property without an asset class, but with the same depreciation method, recovery period, and convention, that you place in service in the same year, can be grouped into the same general asset account.
• Mid-quarter convention. Property subject to the mid-quarter convention can only be grouped into a general asset account with property that is placed in service in the same quarter.
• Mid-month convention. Property subject to the mid-month convention can only be grouped into a general asset account with property that is placed in service in the same month.
• Passenger automobiles. Passenger automobiles subject to the limits on passenger automobile depreciation must be grouped into a separate general asset account.

Dispositions and Conversions

Property in a general asset account is considered disposed of when you do any of the following.

• Permanently withdraw it from use in your trade or business or from the production of income.
• Transfer it to a supplies, scrap, or similar account.
• Sell, exchange, retire, physically abandon, or destroy it.

The retirement of a structural component of real property is not a disposal.

The unadjusted depreciable basis and the depreciation reserve of the general asset account are not affected by your disposition of property from the general asset account. See Delay in basis recovery (loss not realized), later.

You must remove from the general asset account any property you change to personal use. See Change to personal use, later.

Unadjusted depreciable basis. The unadjusted depreciable basis of an item of property in a general asset account is the same amount you would use to figure gain on the sale of the property, but it is figured without taking into account any depreciation taken in earlier years.

The unadjusted depreciable basis of a general asset account is the total of the unadjusted depreciable bases of all the property in the account.

Adjusted depreciable basis. The adjusted depreciable basis of a general asset account is the unadjusted depreciable basis of the account minus any allowed or allowable depreciation based on the account.

Delay in basis recovery (loss not realized). For purposes of determining gain or loss when you dispose of property in a general asset account, treat the property as having an adjusted basis of zero immediately before you dispose of it. No loss can result from its disposition. Also, if you transfer property to a supplies, scrap, or similar account, the basis of the property in the supplies, scrap, or similar account will be zero.

Treatment of amount realized. You must recognize as ordinary income, up to a limit, any amount you realize when you dispose of property in a general asset account. The limit is the result of the following:

• The sum of unadjusted depreciable bases of the general asset account (defined earlier), plus
• Any expensed costs for property in the account that are subject to recapture as depreciation, minus
• Any amount previously recognized as ordinary income upon the disposition of other property from the account.

Expensed costs that are subject to recapture as depreciation include the following.

1. The section 179 deduction.
2. The deduction for clean-fuel vehicles or clean-fuel vehicle refueling property.
3. Amortization of the following.
   1. Pollution control facilities.
   2. Removal of barriers for the elderly and disabled.
   3. Tertiary injectants.
   4. Reforestation expenses.

Example 1. Make and Sell, a calendar-year corporation, maintains one general asset account for ten machines. The machines cost a total of $10,000 and were placed in service in June 2000. One of the ten machines cost $8,200 and the rest cost a total of $1,800. This general asset account is depreciated under the 200% declining balance method with a 5-year recovery period and a half-year convention. Make and Sell does not claim the section 179 deduction on the machines. As of January 1, 2001, the depreciation reserve account is $2,000 [($10,000 - $0) x (40% x 2)].

On February 8, 2001, Make and Sell sells the machine that cost $8,200 to an unrelated person for $9,000. The machine has an adjusted basis of zero.

On its 2001 tax return, Make and Sell recognizes the $9,000 amount realized as ordinary income because it is not more than the unadjusted depreciable basis of the general asset account ($10,000) plus any expensed cost (for example, the section 179 deduction) for property in the account ($0) minus any amounts previously recognized as ordinary income because of dispositions of other property from the account ($0). Also, the unadjusted depreciable basis and depreciation reserve of the account are not affected by the sale of the machine. The depreciation allowance in 2001 is $3,200 [($10,000 - $2,000) x 40%].

Example 2. Assume the same facts as in Example 1 except that on June 4, 2002, Make and Sell sells seven machines to an unrelated person for a total of $1,100. These machines have an adjusted basis of zero.

On its 2002 tax return, Make and Sell recognizes $1,000 as ordinary income (the unadjusted depreciable basis of $10,000 plus the expensed costs ($0), less the $9,000 previously recognized as ordinary income). The recognition and character of the remaining amount realized of $100 ($1,100 - $1,000) is long-term capital gain. Also, the unadjusted depreciable basis and depreciation reserve of the account are not affected by the disposition of the machines. The depreciation allowance for the account in 2002 is $1,920 [($10,000 - $5,200) x 40%].

Nonrecognition transactions. If you transfer general asset account property in a nonrecognition transaction, you must follow the Rules for nonrecognition transactions (explained later). The following are nonrecognition transactions.

• The distribution to one corporation of property in complete liquidation of another corporation.
• The transfer of property to a corporation solely in exchange for stock in that corporation if the transferor is in control of the corporation immediately after the exchange.
• The transfer of property by a corporation that is a party to a reorganization in exchange solely for stock and securities in another corporation that is also a party to the reorganization.
• The contribution of property to a partnership in exchange for an interest in the partnership.
• The distribution of property (including money) from a partnership to a partner.
• Any transaction between members of the same affiliated group during any year for which the group makes a consolidated return.

Rules for nonrecognition transactions. The following rules apply to the nonrecognition transactions described above.

1. You must remove the property from the general asset account as of the first day of the year in which the transaction takes place.
2. You must reduce the unadjusted depreciable basis of the general asset account by the unadjusted depreciable basis of the property as of the first day of the year in which the transaction takes place.
3. You must reduce the depreciation reserve of the general asset account by the depreciation allowed or allowable for the property as of the end of the year immediately before the year of the transaction. Figure depreciation allowed or allowable by using the depreciation method, recovery period, and convention that applies to that general asset account.
4. For purposes of figuring the gain on any later disposition that is subject to ordinary income treatment because it is a disposition from a general asset account, do not take into account any expensed cost (such as a section 179 deduction) for the property being transferred.

Rules for recipient (transferee). The recipient of the property (the person to whom it is transferred) must include at least part of the basis of the property in a general asset account. The amount that must be included is the adjusted basis of the property in your hands (the transferor). If you transferred either all of the property or the last item of property in a general asset account, the recipient's basis in the property is the result of the following.

• The adjusted depreciable basis of the general asset account (defined earlier) as of the beginning of your tax year in which the transaction takes place, minus
• The depreciation allowable to you for the year of the transfer.

Abusive transactions. If a main purpose for disposing of property from a general asset account is to get a tax benefit or a result that would not be available without the use of a general asset account and the transaction is not one of those listed earlier under Nonrecognition transactions, the transaction is an abusive one. Examples of abusive transactions include the following.

• A transaction with a main purpose of shifting income or deductions among taxpayers in a way that would not be possible without choosing to use a general asset account to take advantage of differing effective tax rates.
• A choice to use a general asset account with a main purpose of disposing of property from the general asset account so that you can use an expiring net operating loss or credit.

If you have a net operating loss carryover or a credit carryover, the following transactions may be abusive.

• A transfer to a related person.
• A transfer of property under an agreement where the property continues to be used, or is available for use, by you.

These transactions will be considered abusive transactions unless there is strong evidence to the contrary.

Anti-abuse rule. General asset account treatment for property you dispose of in an abusive transaction ends as of the first day of the year in which you dispose of it. You must determine the gain, loss, or other deduction due to the disposition by taking into account the property's adjusted basis. The adjusted basis of the property at the time of the disposition is the result of the following:

• The unadjusted depreciable basis of the property, minus
• The depreciation allowed or allowable for the property figured by using the depreciation method, recovery period, and convention that applied to the general asset account in which the property was included.

If there is a gain, the amount subject to recapture as ordinary income is the smaller of the following.

1. The depreciation allowed or allowable for the property, including any expensed cost (such as section 179 deductions or the additional depreciation allowed or allowable for the property).
2. The result of the following:
   1. The original unadjusted depreciable basis of the general asset account (plus, for section 1245 property originally included in the general asset account, any expensed cost), minus
   2. The total gain previously recognized as ordinary income on the disposition of property from the general asset account.

If you dispose of property in an abusive transaction, you must also make the adjustments to the general asset account listed earlier under Rules for nonrecognition transactions.

Disposition of all property in a general asset account. If you dispose of all the property, or the last item of property, in a general asset account, you can recover the adjusted depreciable basis of the general asset account. Under this rule, the general asset account ends and you figure the gain or loss for the general asset account by comparing the adjusted depreciable basis of the general asset account with the amount realized.

If the amount realized is more than the adjusted depreciable basis, the difference is a gain. If it is less, the difference is a loss.

If there is a gain, the amount subject to recapture as ordinary income is limited in the same way as explained earlier under Anti-abuse rule.

Example. Duforcelf, a calendar-year corporation, maintains a general asset account for 1,000 calculators. The calculators cost a total of $60,000 and were placed in service in 2000. Assume this general asset account is depreciated under the 200% declining balance method, has a recovery period of 5 years, and uses a half-year convention. Duforcelf does not claim the section 179 deduction on any of the calculators. In 2001, Duforcelf sells 200 of the calculators to an unrelated person for $10,000. The $10,000 is recognized as ordinary income.

On March 26, 2002, Duforcelf sells the remaining calculators in the general asset account to an unrelated person for $35,000. Duforcelf decides to recover the adjusted depreciable basis of the account.

On the date of disposition, the adjusted depreciable basis of the account is $23,040 (unadjusted depreciable basis of $60,000 minus the depreciation allowed or allowable of $36,960). In 2002, Duforcelf recognizes a gain of $11,960. This is the amount realized of $35,000 minus the adjusted depreciable basis of $23,040. The gain of $11,960 is subject to recapture as ordinary income. The amount subject to recapture is limited to the depreciation allowed or allowable minus the amounts previously recognized as ordinary income ($36,960 - $10,000 = $26,960). Therefore, the entire gain of $11,960 is recaptured as ordinary income.

Qualifying dispositions. If you dispose of property in a qualifying disposition (defined later), you can end general asset account treatment for the property as of the first day of the year in which the qualifying disposition occurs. If you end the general asset account treatment, you must figure the gain, loss, or other deduction for the property by taking into account the property's adjusted basis.

If there is a gain, the amount subject to recapture as ordinary income is limited in the same way as explained earlier under Anti-abuse rule.

A qualifying disposition is one that does not involve all the property, or the last item of property, remaining in a general asset account and that is described below.

1. A direct result of fire, storm, shipwreck, other casualty, or theft.
2. A charitable contribution for which a deduction is allowed.
3. A direct result of a cessation, termination, or disposition of a business, manufacturing or other income producing process, operation, facility, plant, or other unit (other than by transfer to a supplies, scrap, or similar account).
4. A transaction in which gain, if any, is not recognized, such as a like-kind exchange or an involuntary conversion.

   This does not include any of the following.

   1. A transaction in which gain is not recognized only because the transaction involves a disposition from a general asset account.
   2. A transaction between members of the same affiliated group during any year for which the group makes a consolidated return.
   3. Any of the following transactions in which gain is not recognized.
      1. The receipt by a corporation of property distributed in complete liquidation of another corporation.
      2. The transfer of property to a corporation solely in exchange for stock in that corporation if the transferor is in control of the corporation immediately after the exchange.
      3. The transfer of property to a corporation that is a party to a reorganization in exchange solely for stock and securities in another corporation that is also a party to the reorganization.
      4. The contribution of property to a partnership in exchange for an interest in the partnership.
      5. The distribution of property (including money) from a partnership to a partner.

For purposes of figuring the basis of property you acquired in a like-kind exchange or an involuntary conversion, treat the ordinary income recognized on the disposition of the property as the gain recognized on the disposition.

Effect of qualifying disposition. If you choose to figure the gain, loss, or other deduction for property disposed of in a qualifying disposition (discussed earlier) by taking into account the property's adjusted basis, you must make the adjustments to the general asset account listed earlier under Rules for nonrecognition transactions.

Example. Sankofa, a calendar-year corporation, maintains one general asset account for 12 machines. Each machine costs $15,000 and was placed in service in 2000. Of the 12 machines, nine cost a total of $135,000 and are used in Sankofa's New York plant and three machines cost $45,000 and are used in Sankofa's New Jersey plant. Assume this general asset account has a depreciation method of 200% declining balance, a recovery period of 5 years, and a half-year convention. Sankofa does not claim the section 179 deduction for any of the machines. As of January 1, 2002, the depreciation account for the general asset account is $93,600.

On May 27, 2002, Sankofa sells its entire manufacturing plant in New Jersey to an unrelated person. The sales proceeds allocated to each of the three machines at the New Jersey plant is $5,000. Because this transaction is a qualifying disposition, Sankofa chooses to figure the gain, loss, or other deduction by taking into account the adjusted basis of the three machines.

For Sankofa's 2002 return, the depreciation allowance for the account is figured as follows. As of December 31, 2001, the depreciation allowed or allowable for the three machines at the New Jersey plant is $23,400. As of January 1, 2002, the unadjusted depreciable basis of the account is reduced from $180,000 to $135,000 ($180,000 minus the unadjusted depreciable basis of $45,000 for the three machines), and the depreciation account is decreased from $93,600 to $70,200 ($93,600 minus depreciation allowed or allowable of $23,400 for the three machines as of December 31, 2001.) The depreciation allowance for the account in 2002 is $25,920 [($135,000 - $70,200) x 40%].

For Sankofa's 2002 return, gain or loss for each of the three machines at the New Jersey plant is determined as follows. The depreciation allowed or allowable in 2002 for each machine is $1,440 [($15,000 - $7,800) x 40% x 2]. The adjusted basis of each machine is $5,760 (the adjusted depreciable basis of $7,200 removed from the account less the depreciation allowed or allowable of $1,440 in 2002). As a result, the loss recognized in 2002 for each machine is $760 ($5,000 - $5,760), which is subject to section 1231 treatment. See Publication 544 for information on section 1231.

Property subject to recapture. If the basis of an item of property in a general asset account is increased as a result of the recapture of the investment credit, the credit for qualified electric vehicles, the section 179 deduction, or the deduction for clean-fuel vehicles and certain refueling property, you must discontinue general asset account treatment for the property as of the first day of the year in which the recapture event occurs. You must remove the property from the general asset account as of the first day of the year in which the recapture occurs and make the adjustments to the general asset account described earlier in items (2) through (4) under Rules for nonrecognition transactions.

Change to personal use. An item of property in a general asset account becomes ineligible for general asset account treatment if you use it in a personal activity. Once you have converted the property to personal use, remove it from the general asset account as of the first day of the year in which the change in use occurs and make the adjustments described earlier in items (2) through (4) under Rules for nonrecognition transactions.

Identification of property disposed of or converted. You can use any reasonable method that is consistently applied to your general asset account to determine the unadjusted depreciable basis of property that you either convert to personal use or dispose of in one of the following transactions.

• Any qualifying disposition (defined earlier).
• Any transaction listed earlier under Nonrecognition transactions.
• Any abusive transaction (defined earlier).
• Any transaction which results in the increase in the basis of an item of property in a general asset account as a result of the recapture of either the investment credit, the credit for qualified electric vehicles, the section 179 deduction, or the deduction for clean-fuel vehicles and certain refueling property.

Effect of adjustments on earlier dispositions. The adjustments made to a general asset account because of a change to personal use or because of any of the transactions listed earlier under Identification of property disposed of or converted have no effect on the recognition and character of prior dispositions in which the adjusted basis is considered to be zero. See Delay in basis recovery (loss not realized), earlier.

Electing To Use a General Asset Account

An election to include property in a general asset account is made separately by each owner of the property. This means that an election to include property in a general asset account must be made at the partnership or S corporation level and not by each partner or shareholder separately.

When to make the election. You must make the election on a timely filed tax return (including extensions) for the year in which you place in service the property included in the general asset account. However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within six months of the due date of the return (excluding extensions). Attach the election to the amended return and write "FILED PURSUANT TO SECTION 301.9100-2" on the election statement. File the amended return at the same address you filed the original return.

How to make the election. Make the election by typing or printing at the top of Form 4562, "GENERAL ASSET ACCOUNT ELECTION MADE UNDER SECTION 168(i)(4)."

You must maintain records that identify the property included in each general asset account, that establish the unadjusted depreciable basis and depreciation reserve of the general asset account, and that reflect the amount realized during the year upon dispositions from each general asset account. However, see the recordkeeping requirements for section 179 property discussed in chapter 2.

When to revoke an election. You can only revoke an election to use the general asset account if one of the following applies.

• There is a substantial distortion of income because you include in a general asset account property that generates foreign source income, both United States and foreign source income, or combined gross income of an FSC, a DISC, or a possessions corporation and its related supplier.
• You dispose of all property remaining in a general asset account.
• You dispose of property in a qualifying disposition (defined earlier).
• You dispose of property in a transaction listed earlier under Nonrecognition transactions.
• There is a transaction with a principal purpose of shifting income or deductions among taxpayers in a way that would not be possible without using general asset accounts and the transaction is not listed earlier under Nonrecognition transactions.
• The basis of an item of property is increased as a result of a recapture of an amount mentioned under Property subject to recapture, earlier.
• You convert property to personal use.

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