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Publication 946
taxmap/pubs/p946-027.htm#en_us_publink1000107616

How Do You Use General Asset Accounts?(p54)

rule

Words you may need to know (see Glossary)

To make it easier to figure MACRS depreciation, you can group separate properties into one or more general asset accounts (GAAs). You then can depreciate all the properties in each account as a single item of property.
taxmap/pubs/p946-027.htm#en_us_publink1000107617

Property you cannot include.(p55)

rule
You cannot include property in a GAA if you use it in both a personal activity and a trade or business (or for the production of income) in the year in which you first place it in service. If property you included in a GAA is later used in a personal activity, see Terminating GAA Treatment, later.
taxmap/pubs/p946-027.htm#en_us_publink1000107618

Property generating foreign source income.(p55)

rule
For information on the GAA treatment of property that generates foreign source income, see sections 1.168(i)-1(f) of the regulations.
taxmap/pubs/p946-027.htm#en_us_publink1000107619

Change in use.(p55)

rule
Special rules apply to figuring depreciation for property in a GAA for which the use changes during the tax year. Examples include a change in use resulting in a shorter recovery period and/or more accelerated depreciation method or a change in use resulting in a longer recovery period and/or a less accelerated depreciation method. See sections 1.168(i)-1(h) and 1.168(i)-4 of the regulations.
taxmap/pubs/p946-027.htm#en_us_publink1000107620

Grouping Property(p55)

rule
Each GAA must include only property you placed in service in the same year and that has the following in common.
The following rules also apply when you establish a GAA.
taxmap/pubs/p946-027.htm#en_us_publink1000107621

Figuring Depreciation for a GAA(p55)

rule
After you have set up a GAA, you generally figure the MACRS depreciation for it by using the applicable depreciation method, recovery period, and convention for the property in the GAA. For each GAA, record the depreciation allowance in a separate depreciation reserve account.
taxmap/pubs/p946-027.htm#en_us_publink1000107622

Example.(p55)

Make & Sell, a calendar-year corporation, set up a GAA for ten machines. The machines cost a total of $10,000 and were placed in service in June 2011. One of the machines cost $8,200 and the rest cost a total of $1,800. This GAA is depreciated under the 200% declining balance method with a 5-year recovery period and a half-year convention. Make & Sell did not claim the section 179 deduction on the machines and the machines did not qualify for a special depreciation allowance. The depreciation allowance for 2011 is $2,000 [($10,000 × 40%) ÷ 2]. As of January 1, 2012, the depreciation reserve account is $2,000.
taxmap/pubs/p946-027.htm#en_us_publink1000107623

Passenger automobiles.(p55)

rule
To figure depreciation on passenger automobiles in a GAA, apply the deduction limits discussed in chapter 5 under Do the Passenger Automobile Limits Apply. Multiply the amount determined using these limits by the number of automobiles originally included in the account, reduced by the total number of automobiles removed from the GAA as discussed in Terminating GAA Treatment, later.
taxmap/pubs/p946-027.htm#en_us_publink1000107624

Disposing of GAA Property(p55)

rule
When you dispose of property included in a GAA, the following rules generally apply.
However, these rules do not apply to any disposition described later under Terminating GAA Treatment.
taxmap/pubs/p946-027.htm#en_us_publink1000107625

Disposition.(p55)

rule
Property in a GAA is considered disposed of when you do any of the following. The retirement of a structural component of real property is not a disposition.
taxmap/pubs/p946-027.htm#en_us_publink1000107626

Treatment of amount realized.(p56)

rule
When you dispose of property in a GAA, you must recognize any amount realized from the disposition as ordinary income, up to a limit. The limit is:
  1. The unadjusted depreciable basis of the GAA plus
  2. Any expensed costs for property in the GAA that are subject to recapture as depreciation (not including any expensed costs for property that you removed from the GAA under the rules discussed later under Terminating GAA Treatment), minus
  3. Any amount previously recognized as ordinary income upon the disposition of other property from the GAA.
taxmap/pubs/p946-027.htm#en_us_publink1000107627
Unadjusted depreciable basis.(p56)
The unadjusted depreciable basis of a GAA is the total of the unadjusted depreciable bases of all the property in the GAA. The unadjusted depreciable basis of an item of property in a GAA is the amount you would use to figure gain or loss on its sale, but figured without reducing your original basis by any depreciation allowed or allowable in earlier years. However, you do reduce your original basis by other amounts, including any amortization deduction, section 179 deduction, special depreciation allowance, and electric vehicle credit.
taxmap/pubs/p946-027.htm#en_us_publink1000107628
Expensed costs.(p56)
Expensed costs that are subject to recapture as depreciation include the following.
  1. The section 179 deduction.
  2. Amortization deductions for the following.
    1. Pollution control facilities.
    2. Removal of barriers for the elderly and disabled.
    3. Tertiary injectants.
    4. Reforestation expenses.
taxmap/pubs/p946-027.htm#en_us_publink1000107629

Example 1.(p56)

The facts are the same as in the example under Figuring Depreciation for a GAA, earlier. In February 2012, Make & Sell sells the machine that cost $8,200 to an unrelated person for $9,000. The machine is treated as having an adjusted basis of zero.
On its 2012 tax return, Make & Sell recognizes the $9,000 amount realized as ordinary income because it is not more than the GAA's unadjusted depreciable basis ($10,000) plus any expensed cost (for example, the section 179 deduction) for property in the GAA ($0), minus any amounts previously recognized as ordinary income because of dispositions of other property from the GAA ($0).
The unadjusted depreciable basis and depreciation reserve of the GAA are not affected by the sale of the machine. The depreciation allowance for the GAA in 2012 is $3,200 [($10,000 − $2,000) × 40%].
taxmap/pubs/p946-027.htm#en_us_publink1000107630

Example 2.(p56)

Assume the same facts as in Example 1. In June 2013, Make & Sell sells seven machines to an unrelated person for a total of $1,100. These machines are treated as having an adjusted basis of zero.
On its 2013 tax return, Make & Sell recognizes $1,000 as ordinary income. This is the GAA's unadjusted depreciable basis ($10,000) plus the expensed costs ($0), minus the amount previously recognized as ordinary income ($9,000). The remaining amount realized of $100 ($1,100 − $1,000) is section 1231 gain (discussed in chapter 3 of Publication 544).
The unadjusted depreciable basis and depreciation reserve of the GAA are not affected by the disposition of the machines. The depreciation allowance for the GAA in 2013 is $1,920 [($10,000 − $5,200) × 40%].
taxmap/pubs/p946-027.htm#en_us_publink1000107631

Terminating GAA Treatment(p56)

rule
You must remove the following property from a GAA.
If you remove property from a GAA, you must make the following adjustments.
  1. Reduce the unadjusted depreciable basis of the GAA by the unadjusted depreciable basis of the property as of the first day of the tax year in which the disposition, change in use, or recapture event occurs. You can use any reasonable method that is consistently applied to determine the unadjusted depreciable basis of the property you remove from a GAA.
  2. Reduce the depreciation reserve account by the depreciation allowed or allowable for the property (computed in the same way as computed for the GAA) as of the end of the tax year immediately preceding the year in which the disposition, change in use, or recapture event occurs.
These adjustments have no effect on the recognition and character of prior dispositions subject to the rules discussed earlier under Disposing of GAA Property.
taxmap/pubs/p946-027.htm#en_us_publink1000107632

Nonrecognition transactions.(p56)

rule
If you dispose of GAA property in a nonrecognition transaction, you must remove it from the GAA. The following are nonrecognition transactions.
taxmap/pubs/p946-027.htm#en_us_publink1000107633
Rules for recipient (transferee).(p57)
The recipient of the property (the person to whom it is transferred) must include your (the transferor's) adjusted basis in the property in a GAA. If you transferred either all of the property or the last item of property in a GAA, the recipient's basis in the property is the result of the following.
For this purpose, the adjusted depreciable basis of a GAA is the unadjusted depreciable basis of the GAA minus any depreciation allowed or allowable for the GAA.
taxmap/pubs/p946-027.htm#en_us_publink1000107634

Abusive transactions.(p57)

rule
If you dispose of GAA property in an abusive transaction, you must remove it from the GAA. A disposition is an abusive transaction if it is not a nonrecognition transaction (described earlier) or a like-kind exchange or involuntary conversion and a main purpose for the disposition is to get a tax benefit or a result that would not be available without the use of a GAA. Examples of abusive transactions include the following.
  1. 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 GAA to take advantage of differing effective tax rates.
  2. A choice to use a GAA with a main purpose of disposing of property from the GAA so that you can use an expiring net operating loss or credit. For example, if you have a net operating loss carryover or a credit carryover, the following transactions will be considered abusive transactions unless there is strong evidence to the contrary.
    1. A transfer of GAA property to a related person.
    2. A transfer of GAA property under an agreement where the property continues to be used, or is available for use, by you.
taxmap/pubs/p946-027.htm#en_us_publink1000107635
Figuring gain or loss.(p57)
You must determine the gain, loss, or other deduction due to an abusive transaction 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:
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 GAA (plus, for section 1245 property originally included in the GAA, any expensed cost), minus
    2. The total gain previously recognized as ordinary income on the disposition of property from the GAA.
taxmap/pubs/p946-027.htm#en_us_publink1000107636

Qualifying dispositions.(p57)

rule
If you dispose of GAA property in a qualifying disposition, you can choose to remove the property from the GAA. A qualifying disposition is one that does not involve all the property, or the last item of property, remaining in a GAA and that is described by any of the following.
  1. A disposition that is a direct result of fire, storm, shipwreck, other casualty, or theft.
  2. A charitable contribution for which a deduction is allowed.
  3. A disposition that is 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 nontaxable transaction other than a nonrecognition transaction (described earlier), a like-kind exchange or involuntary conversion, or a transaction that is nontaxable only because it is a disposition from a GAA.
If you choose to remove the property from the GAA, figure your gain, loss, or other deduction resulting from the disposition in the manner described earlier under Abusive transactions.
taxmap/pubs/p946-027.htm#en_us_publink1000107637

Like-kind exchanges and involuntary conversions.(p58)

rule
If you dispose of GAA property as a result of a like-kind exchange or involuntary conversion, you must remove from the GAA the property that you transferred. See chapter 1 of Publication 544 for information on these transactions. Figure your gain, loss, or other deduction resulting from the disposition in the manner described earlier under Abusive transactions.
taxmap/pubs/p946-027.htm#en_us_publink1000107638

Example.(p58)

Sankofa, a calendar-year corporation, maintains one GAA for 12 machines. Each machine costs $15,000 and was placed in service in 2010. 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 GAA uses the 200% declining balance depreciation method, a 5-year recovery period, and a half-year convention. Sankofa does not claim the section 179 deduction and the machines do not qualify for a special depreciation allowance. As of January 1, 2012, the depreciation reserve account for the GAA is $93,600.
In May 2012, 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. This transaction is a qualifying disposition, so Sankofa chooses to remove the three machines from the GAA and figure the gain, loss, or other deduction by taking into account their adjusted bases.
For Sankofa's 2012 return, the depreciation allowance for the GAA is figured as follows. As of December 31, 2011, the depreciation allowed or allowable for the three machines at the New Jersey plant is $23,400. As of January 1, 2012, the unadjusted depreciable basis of the GAA is reduced from $180,000 to $135,000 ($180,000 minus the $45,000 unadjusted depreciable bases of the three machines), and the depreciation reserve account is decreased from $93,600 to $70,200 ($93,600 minus $23,400 depreciation allowed or allowable for the three machines as of December 31, 2011). The depreciation allowance for the GAA in 2012 is $25,920 [($135,000 − $70,200) × 40%].
For Sankofa's 2012 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 2012 for each machine is $1,440 [(($15,000 − $7,800) × 40%) ÷ 2]. The adjusted basis of each machine is $5,760 (the adjusted depreciable basis of $7,200 removed from the account less the $1,440 depreciation allowed or allowable in 2012). As a result, the loss recognized in 2012 for each machine is $760 ($5,000 − $5,760). This loss is subject to section 1231 treatment. See chapter 3 of Publication 544 for information on section 1231 losses.
taxmap/pubs/p946-027.htm#en_us_publink1000107639

Disposition of all property in a GAA.(p58)

rule
If you dispose of all the property, or the last item of property, in a GAA, you can choose to end the GAA. If you make this choice, you figure the gain or loss by comparing the adjusted depreciable basis of the GAA with the amount realized.
If there is a gain, the amount subject to recapture as ordinary income is limited to the result of the following.
taxmap/pubs/p946-027.htm#en_us_publink1000107640
Like-kind exchanges and involuntary conversions.(p58)
If you dispose of all the property or the last item of property in a GAA as a result of a like-kind exchange or involuntary conversion, the GAA terminates. You must figure the gain or loss in the manner described above under Disposition of all property in a GAA.
taxmap/pubs/p946-027.htm#en_us_publink1000107641

Example.(p58)

Duforcelf, a calendar-year corporation, maintains a GAA for 1,000 calculators that cost a total of $60,000 and were placed in service in 2009. Assume this GAA 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 and the calculators do not qualify for a special depreciation allowance. In 2011, Duforcelf sells 200 of the calculators to an unrelated person for $10,000. The $10,000 is recognized as ordinary income.
In March 2012, Duforcelf sells the remaining calculators in the GAA to an unrelated person for $35,000. Duforcelf decides to end the GAA.
On the date of the 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 2012, 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 subject to recapture as ordinary income 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.
taxmap/pubs/p946-027.htm#en_us_publink1000107642

Electing To Use a GAA(p58)

rule
An election to include property in a GAA is made separately by each owner of the property. This means that an election to include property in a GAA must be made by each member of a consolidated group and at the partnership or S corporation level (and not by each partner or shareholder separately).
taxmap/pubs/p946-027.htm#en_us_publink1000107643

How to make the election.(p58)

rule
Make the election by completing line 18 of Form 4562.
taxmap/pubs/p946-027.htm#en_us_publink1000107644

When to make the election.(p58)

rule
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 GAA. However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended return within 6 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.
Where Refund
You must maintain records that identify the property included in each GAA, that establish the unadjusted depreciable basis and depreciation reserve of the GAA, and that reflect the amount realized during the year upon dispositions from each GAA. However, see chapter 2 for the recordkeeping requirements for section 179 property.
taxmap/pubs/p946-027.htm#en_us_publink1000107646

Revoking an election.(p59)

rule
You can revoke an election to use a GAA only in the following situations.