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 for you to figure MACRS depreciation, you cangroup separate properties into one or more general asset accounts. Youcan then depreciate all of the properties in each account as a singleitem of property. Each account can include only property with similarcharacteristics, such as asset class and recovery period. Someproperty cannot be included in a general asset account. There areadditional rules for passenger automobiles, disposing of property,converting property to personal use, and property that generatesforeign source income. After you have set up a general asset account, you generally figurethe amount of depreciation for each account by using the depreciationmethod, recovery period, and convention that applies to the propertyin the account. For each general asset account, record thedepreciation allowance in a separate depreciation reserve account. Passenger automobiles.To figure depreciation on passenger automobiles in a general assetaccount, apply the deduction limits discussed later in chapter 4.Multiply the amounts determined using these limits by the number ofautomobiles originally included in the account reduced by the totalnumber of automobiles disposed of (or changed to personal use) duringthe year and any previous year in any of the following types oftransactions. These are discussed later under Dispositions andConversions. Qualifying dispositions. Nonrecognition transactions. Abusive transactions. Dispositions leading to the recapture of certain credits anddeductions. Property you cannot include.You cannot include property in a general asset account if you useit in both a trade or business (or for the production of income) andin a personal activity in the year in which you first place it inservice. Property generating foreign source income.For information on the general asset account treatment of propertythat generates foreign source income, see section 1.168(i)-1(f) of theregulations. You can read the regulations at many public libraries andIRS offices. How To Group Property in General Asset Accounts Each general asset account must include only property that youplaced in service in the same year and that has the following incommon. Asset class. Recovery period. Depreciation method. Convention. The following rules also apply when you establish a general assetaccount. No asset class. Property without an asset class,but with the same depreciation method, recovery period, andconvention, that you place in service in the same year, can be groupedinto the same general asset account. Mid-quarter convention. Property subject to themid-quarter convention can only be grouped into a general assetaccount with property that is placed in service in the same quarter. Mid-month convention. Property subject to themid-month convention can only be grouped into a general asset accountwith property that is placed in service in the same month. Passenger automobiles. Passenger automobilessubject to the limits on passenger automobile depreciation must begrouped into a separate general asset account. Dispositions and Conversions Property in a general asset account is considered disposed of whenyou do any of the following. Permanently withdraw it from use in your trade or businessor from the production of income. Transfer it to a supplies, scrap, or similar account. Sell, exchange, retire, physically abandon, or destroyit. The retirement of a structural component of real property isnot a disposal. The unadjusted depreciable basis and the depreciation reserve ofthe general asset account are not affected by your disposition ofproperty from the general asset account. See Delay in basisrecovery (loss not realized), later. You must remove from the general asset account any property youchange to personal use. See Change to personal use, later. Unadjusted depreciable basis.The unadjusted depreciable basis of an item of property in ageneral asset account is the same amount you would use to figure gainon the sale of the property, but it is figured without taking intoaccount any depreciation taken in earlier years. The unadjusted depreciable basis of a general asset account is thetotal of the unadjusted depreciable bases of all of the property inthe account. Adjusted depreciable basis.The adjusted depreciable basis of a general asset account is theunadjusted depreciable basis of the account minus any allowed orallowable depreciation based on the account. Delay in basis recovery (loss not realized).For purposes of determining gain or loss, when you dispose ofproperty in a general asset account, treat the property as having anadjusted basis of zero immediately before you dispose of it. No losscan result from its disposition. Also, if you transfer property to asupplies, scrap, or similar account, the basis of the property in thesupplies, scrap, or similar account will be zero. Treatment of amount realized.You must recognize as ordinary income, up to a limit, any amountyou 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 assetaccount (defined earlier), plus Any expensed costs for property in the account that aresubject to recapture as depreciation, minus Any amount previously recognized as ordinary income upon thedisposition of other property from the account. Expensed costs that are subject to recapture as depreciationinclude the following. The section 179 deduction. The deduction for clean-fuel vehicles or clean-fuel vehiclerefueling property. Amortization of the following. Pollution control facilities. Removal of barriers for the elderly and disabled. Tertiary injectants. Reforestation expenses. Example 1.Make and Sell, a calendar-year corporation, maintains one generalasset account for ten machines. The machines cost a total of $10,000and were placed in service in June 1999. One of the ten machines cost$8,200 and the rest cost a total of $1,800. This general asset accountis depreciated under the 200% declining balance method with a 5-yearrecovery period and a half-year convention. Make and Sell does notclaim the section 179 deduction on the machines. As of January 1,2000, the depreciation reserve account is $2,000 [($10,000- $0) (40% 2)]. On February 8, 2000, Make and Sell sells the machine that cost$8,200 to an unrelated person for $9,000. The machine has an adjustedbasis of zero. On its 2000 tax return, Make and Sell recognizes the $9,000 amountrealized as ordinary income because it is not more than the unadjusteddepreciable basis of the general asset account ($10,000) plus anyexpensed cost (for example, the section 179 deduction) for property inthe account ($0) minus any amounts previously recognized as ordinaryincome because of dispositions of other property from the account($0). Also, the unadjusted depreciable basis and depreciation reserveof the account are not affected by the sale of the machine. Thedepreciation allowance in 2000 is $3,200 [($10,000 -$2,000) 40%]. Example 2.Assume the same facts as in Example 1 except that on June 4, 2001,Make and Sell sells seven machines to an unrelated person for a totalof $1,100. These machines have an adjusted basis of zero. On its 2001 tax return, Make and Sell recognizes $1,000 as ordinaryincome (the unadjusted depreciable basis of $10,000 plus the expensedcosts ($0), less the amount of $9,000 previously recognized asordinary income). The recognition and character of the remainingamount realized of $100 ($1,100 - $1,000) is long-term capitalgain. Also, the unadjusted depreciable basis and depreciation reserveof the account are not affected by the disposition of the machines.The depreciation allowance for the account in 2001 is $1,920[($10,000 - $5,200) 40%]. Nonrecognition transactions.If you transfer general asset account property in a nonrecognitiontransaction, you must follow the Rules for nonrecognitiontransactions (explained later). The following are nonrecognitiontransactions. The distribution to one corporation of property in completeliquidation of another corporation. The transfer of property to a corporation solely in exchangefor stock in that corporation if the transferor is in control of thecorporation immediately after the exchange. The transfer of property by a corporation that is a party toa reorganization in exchange solely for stock and securities inanother corporation that is also a party to the reorganization. The contribution of property to a partnership in exchangefor an interest in the partnership. The distribution of property (including money) from apartnership to a partner. Any transaction between members of the same affiliated groupduring any year for which the group makes a consolidatedreturn. Rules for nonrecognition transactions.cheap hotel in CascaisThe following rules apply to the nonrecognition transactionsdescribed above. You must remove the property from the general asset accountas of the first day of the year in which the transaction takes place. You must reduce the unadjusted depreciable basis of thegeneral asset account by the unadjusted depreciable basis of theproperty as of the first day of the year in which the transactiontakes place. You must reduce the depreciation reserve of the generalasset account by the depreciation allowed or allowable for theproperty as of the end of the year immediately before the year of thetransaction. Figure depreciation allowed or allowable by using thedepreciation method, recovery period, and convention that applies tothat general asset account. For purposes of figuring the amount of gain on any laterdisposition that is subject to ordinary income treatment because it isa disposition from a general asset account, do not take into accountany expensed cost (such as a section 179 deduction) for the propertybeing transferred. Rules for recipient (transferee).The recipient of the property (the person to whom it istransferred) must include at least part of the basis of the propertyin a general asset account. The amount that must be included is theadjusted basis of the property in your hands (the transferor). If youtransferred either all of the property or the last item of property ina general asset account, the recipient's basis in the property is theresult of the following. The adjusted depreciable basis of the general asset account(defined earlier) as of the beginning of your tax year in which thetransaction takes place, minus The amount of depreciation allowable to you for the year ofthe transfer. Abusive transactions.If a main purpose for disposing of property from a general assetaccount is to get a tax benefit or a result that would not beavailable without the use of a general asset account and thetransaction is not one of those listed earlier underNonrecognition transactions, the transaction is an abusiveone. Examples of abusive transactions include the following. A transaction with a main purpose of shifting income ordeductions among taxpayers in a way that would not be possible withoutmaking a choice to use a general asset account so that you can takeadvantage of differing effective tax rates. A choice to use a general asset account with a main purposeof disposing of property from the general asset account so that youcan use an expiring net operating loss or credit. If you have a net operating loss carryover or a creditcarryover, the following transactions may be abusive. A transfer to a related person. A transfer of property under an agreement where the propertycontinues to be used or is available for use by you. These transactions will be considered abusive transactionsunless there is strong evidence to the contrary. Anti-abuse rule.General asset account treatment for property you dispose of in anabusive transaction ends as of the first day of the year in which youdispose of it. You must determine the amount of gain, loss, or otherdeduction due to the disposition by taking into account the property'sadjusted basis. The adjusted basis of the property at the time of thedisposition is the result of the following: The unadjusted depreciable basis of the property, minus The depreciation allowed or allowable for the propertyfigured by using the depreciation method, recovery period, andconvention that applied to the general asset account in which theproperty was included. If there is a gain, the amount subject to recapture as ordinaryincome is the smaller of the following. The depreciation allowed or allowable for the property,including any expensed cost (such as section 179 deductions or theadditional depreciation allowed or allowable for the property). The result of the following: The original unadjusted depreciable basis of the generalasset account (plus, for section 1245 property originally included inthe general asset account, any expensed cost), minus The total amount of gain previously recognized as ordinaryincome on the disposition of property from the general asset account. If you dispose of property in an abusive transaction, you must alsomake the adjustments to the general asset account listed earlier underRules 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 depreciablebasis of the general asset account. Under this rule, the general assetaccount ends and you figure the amount of gain or loss for the generalasset account by comparing the adjusted depreciable basis of thegeneral 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 that is subject to recapture asordinary income is limited in the same way as explained earlier underAnti-abuse rule. Example.Duforcelf, a calendar-year corporation, maintains a general assetaccount for 1,000 calculators. The calculators cost a total of $60,000and were placed in service in 1999. Assume this general asset accountis depreciated under the 200% declining balance method, has a recoveryperiod of 5 years, and uses a half-year convention. Duforcelf does notclaim the section 179 deduction on any of the calculators. In 2000,Duforcelf sells 200 of the calculators to an unrelated person for$10,000. The $10,000 is recognized as ordinary income. On March 26, 2001, Duforcelf sells the remaining calculators in thegeneral asset account to an unrelated person for $35,000. Duforcelfdecides to recover the adjusted depreciable basis of the account. On the date of disposition, the adjusted depreciable basis of theaccount is $23,040 (unadjusted depreciable basis of $60,000 minus thedepreciation allowed or allowable of $36,960). In 2001, Duforcelfrecognizes a gain of $11,960. This is the amount realized of $35,000minus the adjusted depreciable basis of $23,040. The gain of $11,960is subject to recapture as ordinary income. The amount subject torecapture is limited to the depreciation allowed or allowable minusthe amounts previously recognized as ordinary income ($36,960 -$10,000 = $26,960). Therefore, the entire gain of $11,960 isrecaptured as ordinary income. Qualifying dispositions.If you dispose of property in a qualifying disposition (definedlater), you can end general asset account treatment for the propertyas of the first day of the year in which the qualifying dispositionoccurs. If you end the general asset account treatment, you mustfigure the amount of gain, loss, or other deduction for the propertyby taking into account the property's adjusted basis. If there is a gain, the amount that is subject to recapture asordinary income is limited in the same way as explained earlier underAnti-abuse rule. A qualifying disposition is one that does not involveall the property, or the last item of property, remaining in a generalasset account and that is described below. A direct result of fire, storm, shipwreck, other casualty,or theft. A charitable contribution for which a deduction is allowed. A direct result of a cessation, termination, or dispositionof a business, manufacturing or other income producing process,operation, facility, plant, or other unit (other than by transfer to asupplies, scrap, or similar account). A transaction in which gain, if any, is not recognized, suchas a like-kind exchange or an involuntary conversion. This does not include any of the following. A transaction in which gain is not recognized only becausethe transaction involves a disposition from a general assetaccount. A transaction between members of the same affiliated groupduring any year for which the group makes a consolidatedreturn. Any of the following transactions in which gain is notrecognized. The receipt by a corporation of property distributed incomplete liquidation of another corporation. The transfer of property to a corporation solely in exchangefor stock in that corporation if the transferor is in control of thecorporation immediately after the exchange. The transfer of property to a corporation that is a party toa reorganization in exchange solely for stock and securities inanother corporation that is also a party to the reorganization. The contribution of property to a partnership in exchangefor an interest in the partnership. The distribution of property (including money) from apartnership to a partner. For purposes of figuring the basis of property you acquired in alike-kind exchange or an involuntary conversion, treat the amount ofordinary income recognized on the disposition of the property as theamount of gain recognized on the disposition. Effect of qualifying disposition.If you choose to figure the amount of gain, loss, or otherdeduction for property disposed of in a qualifying disposition(discussed earlier) by taking into account the property's adjustedbasis, you must make the adjustments to the general asset accountlisted earlier under Rules for nonrecognition transactions. Example.Sankofa, a calendar-year corporation, maintains one general assetaccount for 12 machines. Each machine costs $15,000 and was placed inservice in 1999. Of the 12 machines, nine cost a total of $135,000 andare used in Sankofa's New York plant and three machines cost $45,000and are used in Sankofa's New Jersey plant. Assume this general assetaccount has a depreciation method of 200% declining balance, arecovery period of 5 years, and a half-year convention. Sankofa doesnot claim the section 179 deduction for any of the machines. As ofJanuary 1, 2001, the depreciation account for the general assetaccount is $93,600. On May 27, 2001, Sankofa sells its entire manufacturing plant inNew Jersey to an unrelated person. The sales proceeds allocated toeach of the three machines at the New Jersey plant is $5,000. Becausethis transaction is a qualifying disposition, Sankofa chooses tofigure the amount of gain, loss, or other deduction by taking intoaccount the adjusted basis of the three machines. For Sankofa's 2001 return, the depreciation allowance for theaccount is figured as follows. As of December 31, 2000, thedepreciation allowed or allowable for the three machines at the NewJersey plant is $23,400. As of January 1, 2001, the unadjusteddepreciable basis of the account is reduced from $180,000 to $135,000($180,000 minus the unadjusted depreciable basis of $45,000 for thethree 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, 2000.) Thedepreciation allowance for the account in 2001 is $25,920[($135,000 - $70,200) 40%]. For Sankofa's 2001 return, gain or loss for each of the threemachines at the New Jersey plant is determined as follows. Thedepreciation allowed or allowable in 2001 for each machine is $1,440[($15,000 - $7,800) 40% 2]. Theadjusted basis of each machine is $5,760 (the adjusted depreciablebasis of $7,200 removed from the account less the depreciation allowedor allowable of $1,440 in 2001). As a result, the loss recognized in2001 for each machine is $760 ($5,000 - $5,760), which issubject to section 1231 treatment. See Publication 544for informationon section 1231. Property subject to recapture.If the basis of an item of property in a general asset account isincreased as a result of the recapture of the investment credit, thecredit for qualified electric vehicles, the section 179 deduction, orthe deduction for clean-fuel vehicles and certain refueling property,you must discontinue general asset account treatment for the propertyas 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 thefirst day of the year in which the recapture occurs and make theadjustments 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 ineligiblefor general asset account treatment if you use it in a personalactivity. Once you have converted the property to personal use, removeit from the general asset account as of the first day of the year inwhich the change in use occurs and make the adjustments describedearlier in items (2) through (4) under Rules for nonrecognitiontransactions. Identification of property disposed of or converted.You can use any reasonable method that is consistently applied toyour general asset account to determine the unadjusted depreciablebasis of property that you either convert to personal use or disposeof in one of the following transactions. Any qualifying disposition (defined earlier). Any transaction listed earlier under Nonrecognitiontransactions. Any abusive transaction (defined earlier). Any transaction which results in the increase in the basisof an item of property in a general asset account as a result of therecapture of either the investment credit, the credit for qualifiedelectric vehicles, the section 179 deduction, or the deduction forclean-fuel vehicles and certain refueling property. Effect of adjustments on earlier dispositions.The adjustments made to a general asset account because of a changeto personal use or because of any of the transactions listed earlierunder Identification of property disposed of or convertedhave no effect on the recognition and character of priordispositions in which the adjusted basis is considered to be zero. SeeDelay in basis recovery (loss not realized), earlier. Electing To Use GeneralAsset Accounts An election to include property in a general asset account is madeseparately by each owner of the property. This means that an electionto include property in a general asset account must be made at thepartnership or S corporation level and not by each partner orshareholder separately. When to make the election.You must make the election on a timely filed tax return (includingextensions) for the year in which you place in service the propertyincluded in the general asset account. However, if you timely filedyour return for the year without making the election, you can stillmake the election by filing an amended return within six months of thedue date of the return (excluding extensions). Attach the election tothe amended return and write "Filed pursuant to section301.9100-2" on the election statement. File the amendedreturn 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)." Records.You must maintain records that identify the property included ineach general asset account, that establish the unadjusted depreciablebasis and depreciation reserve of the general asset account, and thatreflect the amount realized during the year upon dispositions fromeach general asset account. However, see the recordkeepingrequirements 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 ifone of the following applies. There is a substantial distortion of income because youinclude in a general asset account property that generates foreignsource income, both United States and foreign source income, orcombined gross income of an FSC, a DISC, or a possessions corporationand its related supplier. You dispose of all property remaining in a general assetaccount. You dispose of property in a qualifying disposition (definedearlier). You dispose of property in a transaction listed earlierunder Nonrecognition transactions. There is a transaction with a principal purpose of shiftingincome or deductions among taxpayers in a way that would not bepossible without using general asset accounts and the transaction isnot listed earlier under Nonrecognition transactions. The basis of an item of property is increased as a result ofa recapture of an amount mentioned under Property subject torecapture, earlier. You convert property to personal use.