Reg. § 1.168(i)-1 General asset accounts.
(a) Scope This section provides rules for general asset accounts under section . The provisions of this section apply only to assets for which an election has been made under of this section.
(b) Definitions For purposes of this section, the following definitions apply:
(1) Unadjusted depreciable basis has the same meaning given such term in .
(2) Unadjusted depreciable basis of the general asset account is the sum of the unadjusted depreciable bases of all assets included in the general asset account.
(3) Adjusted depreciable basis of the general asset account is the unadjusted depreciable basis of the general asset account less the adjustments to basis described in section and (3).
(4) Building has the same meaning as that term is defined in .
(5) Expensed cost is the amount of any allowable credit or deduction treated as a deduction allowable for depreciation or amortization for purposes of section (for example, a credit allowable under section or a deduction allowable under section , section , or section ). Expensed cost does not include any additional first year depreciation deduction.
(6) Mass assets is a mass or group of individual items of depreciable assets—
(i) That are not necessarily homogenous;
(ii) Each of which is minor in value relative to the total value of the mass or group;
(iii) Numerous in quantity;
(iv) Usually accounted for only on a total dollar or quantity basis;
(v) With respect to which separate identification is impracticable; and
(vi) Placed in service in the same taxable year.
(7) Portion of an asset is any part of an asset that is less than the entire asset as determined under of this section.
(8) Remaining adjusted depreciable basis of the general asset account is the unadjusted depreciable basis of the general asset account less the amount of the additional first year depreciation deduction allowed or allowable, whichever is greater, for the general asset account.
(9) Structural component has the same meaning as that term is defined in .
(c) Establishment of general asset accounts
(1) Assets eligible for general asset accounts
(i) General rules Assets that are subject to either the general depreciation system of section or the alternative depreciation system of section may be accounted for in one or more general asset accounts. An asset is included in a general asset account only to the extent of the asset's unadjusted depreciable basis. However, an asset is not to be included in a general asset account if the asset is used both in a trade or business or for the production of income and in a personal activity at any time during the taxable year in which the asset is placed in service by the taxpayer or if the asset is placed in service and disposed of during the same taxable year.
(ii) Special rules for assets generating foreign source income
(A) Assets that generate foreign source income, both United States and foreign source income, or combined gross income of a foreign sales corporation (as defined in former section 922), domestic international sales corporation (as defined in section ), or possession corporation (as defined in section ) and its related supplier may be included in a general asset account if the requirements of of this section are satisfied. If, however, the inclusion of these assets in a general asset account results in a substantial distortion of income, the Commissioner may disregard the general asset account election and make any reallocations of income or expense necessary to clearly reflect income.
(B) A general asset account shall be treated as a single asset for purposes of applying the rules in (relating to allocation and apportionment of interest expense under the asset method). A general asset account that generates income in more than one grouping of income (statutory and residual) is a multiple category asset (as defined in ), and the income yield from the general asset account must be determined by applying the rules for multiple category assets as if the general asset account were a single asset.
(2) Grouping assets in general asset accounts
(i) General rules If a taxpayer makes the election under of this section, assets that are subject to the election are grouped into one or more general asset accounts. Assets that are eligible to be grouped into a single general asset account may be divided into more than one general asset account. Each general asset account must include only assets that—
(A) Have the same applicable depreciation method;
(B) Have the same applicable recovery period;
(C) Have the same applicable convention; and
(D) Are placed in service by the taxpayer in the same taxable year.
(ii) Special rules In addition to the general rules in of this section, the following rules apply when establishing general asset accounts—
(A) Assets subject to the mid-quarter convention may only be grouped into a general asset account with assets that are placed in service in the same quarter of the taxable year;
(B) Assets subject to the mid-month convention may only be grouped into a general asset account with assets that are placed in service in the same month of the taxable year;
(C) Passenger automobiles for which the depreciation allowance is limited under section must be grouped into a separate general asset account;
(D) Assets not eligible for any additional first year depreciation deduction, including assets for which the taxpayer elected not to deduct the additional first year depreciation, provided by, for example, section , section , section , section , section 1400L(b), or section 1400N(d), must be grouped into a separate general asset account;
(E) Assets eligible for the additional first year depreciation deduction may only be grouped into a general asset account with assets for which the taxpayer claimed the same percentage of the additional first year depreciation (for example, 30 percent, 50 percent, or 100 percent);
(F) Except for passenger automobiles described in of this section, listed property (as defined in section ) must be grouped into a separate general asset account;
(G) Assets for which the depreciation allowance for the placed-in-service year is not determined by using an optional depreciation table (for further guidance, see section 8 of Rev. Proc. 87-57, 1987-2 CB 687, 693 (see )) must be grouped into a separate general asset account;
(H) Mass assets that are or will be subject to of this section (disposed of or converted mass asset is identified by a mortality dispersion table) must be grouped into a separate general asset account; and
(I) Assets subject to of this section (change in use results in a shorter recovery period or a more accelerated depreciation method) for which the depreciation allowance for the year of change (as defined in ) is not determined by using an optional depreciation table must be grouped into a separate general asset account.
(3) Examples The following examples illustrate the application of this :
Example 1. In 2014, J, a proprietorship with a calendar year-end, purchases and places in service one item of equipment that costs $550,000. This equipment is section property and also is 5-year property under section . On its Federal tax return for 2014, J makes an election under section to expense $25,000 of the equipment's cost and makes an election under of this section to include the equipment in a general asset account. As a result, the unadjusted depreciable basis of the equipment is $525,000. In accordance with of this section, J must include only $525,000 of the equipment's cost in the general asset account.
Example 2. In 2014, K, a proprietorship with a calendar year-end, purchases and places in service 100 items of equipment. All of these items are 5-year property under section , are not listed property, and are not eligible for any additional first year depreciation deduction. On its Federal tax return for 2014, K does not make an election under section to expense the cost of any of the 100 items of equipment and does make an election under of this section to include the 100 items of equipment in a general asset account. K depreciates its 5-year property placed in service in 2014 using the optional depreciation table that corresponds with the general depreciation system, the 200-percent declining balance method, a 5-year recovery period, and the half-year convention. In accordance with of this section, K includes all of the 100 items of equipment in one general asset account.
Example 3. The facts are the same as in Example 2, except that K decides not to include all of the 100 items of equipment in one general asset account. Instead and in accordance with of this section, K establishes 100 general asset accounts and includes one item of equipment in each general asset account.
Example 4. L, a calendar-year corporation, is a wholesale distributer. In 2014, L places in service the following properties for use in its wholesale distribution business: Computers, automobiles, and forklifts. On its Federal tax return for 2014, L does not make an election under section to expense the cost of any of these items of equipment and does make an election under of this section to include all of these items of equipment in a general asset account. All of these items are 5-year property under section and are not eligible for any additional first year depreciation deduction. The computers are listed property, and the automobiles are listed property and are subject to section . L depreciates its 5-year property placed in service in 2014 using the optional depreciation table that corresponds with the general depreciation system, the 200-percent declining balance method, a 5-year recovery period, and the half-year convention. Although the computers, automobiles, and forklifts are 5-year property, L cannot include all of them in one general asset account because the computers and automobiles are listed property. Further, even though the computers and automobiles are listed property, L cannot include them in one general asset account because the automobiles also are subject to section . In accordance with of this section, L establishes three general asset accounts: One for the computers, one for the automobiles, and one for the forklifts.
Example 5. M, a fiscal-year corporation with a taxable year ending June 30, purchases and places in service ten items of new equipment in October 2014, and purchases and places in service five other items of new equipment in February 2015. On its Federal tax return for the taxable year ending June 30, 2015, M does not make an election under section to expense the cost of any of these items of equipment and does make an election under of this section to include all of these items of equipment in a general asset account. All of these items of equipment are 7-year property under section , are not listed property, and are property described in section . All of the ten items of equipment placed in service in October 2014 are eligible for the 50-percent additional first year depreciation deduction provided by section . All of the five items of equipment placed in service in February 2015 are not eligible for any additional first year depreciation deduction. M depreciates its 7-year property placed in service for the taxable year ending June 30, 2015, using the optional depreciation table that corresponds with the general depreciation system, the 200-percent declining balance method, a 7-year recovery period, and the half-year convention. Although the 15 items of equipment are depreciated using the same depreciation method, recovery period, and convention, M cannot include all of them in one general asset account because some of items of equipment are not eligible for any additional first year depreciation deduction. In accordance with of this section, M establishes two general asset accounts: one for the ten items of equipment eligible for the 50-percent additional first year depreciation deduction and one for the five items of equipment not eligible for any additional first year depreciation deduction.
(d) Determination of depreciation allowance
(1) In general Depreciation allowances are determined for each general asset account. The depreciation allowances must be recorded in a depreciation reserve account for each general asset account. The allowance for depreciation under this section constitutes the amount of depreciation allowable under section .
(2) Assets in general asset account are eligible for additional first year depreciation deduction If all the assets in a general asset account are eligible for the additional first year depreciation deduction, the taxpayer first must determine the allowable additional first year depreciation deduction for the general asset account for the placed-in-service year and then must determine the amount otherwise allowable as a depreciation deduction for the general asset account for the placed-in-service year and any subsequent taxable year. The allowable additional first year depreciation deduction for the general asset account for the placed-in-service year is determined by multiplying the unadjusted depreciable basis of the general asset account by the additional first year depreciation deduction percentage applicable to the assets in the account (for example, 30 percent, 50 percent, or 100 percent). The remaining adjusted depreciable basis of the general asset account then is depreciated using the applicable depreciation method, recovery period, and convention for the assets in the account.
(3) No assets in general asset account are eligible for additional first year depreciation deduction If none of the assets in a general asset account are eligible for the additional first year depreciation deduction, the taxpayer must determine the allowable depreciation deduction for the general asset account for the placed-in-service year and any subsequent taxable year by using the applicable depreciation method, recovery period, and convention for the assets in the account.
(4) Special rule for passenger automobiles For purposes of applying section , the depreciation allowance for a general asset account established for passenger automobiles is limited for each taxable year to the amount prescribed in section multiplied by the excess of the number of automobiles originally included in the account over the number of automobiles disposed of during the taxable year or in any prior taxable year in a transaction described in paragraph (e)(3)(iii) (disposition of an asset in a qualifying disposition), paragraph (e)(3)(iv) (transactions subject to section ), paragraph (e)(3)(v) (transactions subject to section or section ), paragraph (e)(3)(vi) (technical termination of a partnership), paragraph (e)(3)(vii) (anti-abuse rule), paragraph (g) (assets subject to recapture), or paragraph (h)(1) (conversion to any personal use) of this section.
(e) Dispositions from a general asset account
(1) Scope and definition
(i) In general This provides rules applicable to dispositions of assets included in a general asset account. For purposes of this , an asset in a general asset account is disposed of when ownership of the asset is transferred or when the asset is permanently withdrawn from use either in the taxpayer's trade or business or in the production of income. A disposition includes the sale, exchange, retirement, physical abandonment, or destruction of an asset. A disposition also occurs when an asset is transferred to a supplies, scrap, or similar account, or when a portion of an asset is disposed of as described in of this section. If a structural component, or a portion thereof, of a building is disposed of in a disposition described in of this section, a disposition also includes the disposition of such structural component or such portion thereof.
(ii) Disposition of a portion of an asset For purposes of applying of this section, a disposition includes a disposition of a portion of an asset in a general asset account as a result of a casualty event described in section , a disposition of a portion of an asset in a general asset account for which gain, determined without regard to section or section , is not recognized in whole or in part under section or section , a transfer of a portion of an asset in a general asset account in a transaction described in section , a sale of a portion of an asset in a general asset account, or a disposition of a portion of an asset in a general asset account in a transaction described in of this section. For other transactions, a disposition includes a disposition of a portion of an asset in a general asset account only if the taxpayer makes the election under of this section to terminate the general asset account in which that disposed portion is included or makes the election under of this section for that disposed portion.
(2) General rules for a disposition
(i) No immediate recovery of basis Except as provided in of this section, immediately before a disposition of any asset in a general asset account or a disposition of a portion of such asset as described in of this section, the asset or the portion of the asset, as applicable, is treated as having an adjusted depreciable basis (as defined in ) of zero for purposes of section . Therefore, no loss is realized upon the disposition of an asset from the general asset account or upon the disposition of a portion of such asset as described in of this section. Similarly, where an asset or a portion of an asset, as applicable, is disposed of by transfer to a supplies, scrap, or similar account, the basis of the asset or the portion of the asset, as applicable, in the supplies, scrap, or similar account will be zero.
(ii) Treatment of amount realized Any amount realized on a disposition is recognized as ordinary income, notwithstanding any other provision of subtitle A of the Internal Revenue Code (Code), to the extent the sum of the unadjusted depreciable basis of the general asset account and any expensed cost (as defined in of this section) for assets in the account exceeds any amounts previously recognized as ordinary income upon the disposition of other assets in the account or upon the disposition of portions of such assets as described in of this section. The recognition and character of any excess amount realized are determined under other applicable provisions of the Code other than sections and or provisions of the Code that treat gain on a disposition as subject to section or section .
(iii) Effect of disposition on a general asset account Except as provided in of this section, the unadjusted depreciable basis and the depreciation reserve of the general asset account are not affected as a result of a disposition of an asset from the general asset account or of a disposition of a portion of such asset as described in of this section.
(iv) Coordination with nonrecognition provisions For purposes of determining the basis of an asset or a portion of an asset, as applicable, acquired in a transaction, other than a transaction described in paragraph (e)(3)(iv) (pertaining to transactions subject to section ), paragraph (e)(3)(v) (pertaining to transactions subject to section or section ), and paragraph (e)(3)(vi) (pertaining to technical terminations of partnerships) of this section, to which a nonrecognition section of the Code applies, determined without regard to this section, the amount of ordinary income recognized under this is treated as the amount of gain recognized on the disposition.
(v) Manner of disposition The manner of disposition (for example, normal retirement, abnormal retirement, ordinary retirement, or extraordinary retirement) is not taken into account in determining whether a disposition occurs or gain or loss is recognized.
(vi) Disposition by transfer to a supplies account If a taxpayer made an election under to treat the cost of any rotable spare part, temporary spare part, or standby emergency spare part (as defined in ) as a capital expenditure subject to the allowance for depreciation and also made an election under of this section to include that rotable, temporary, or standby emergency spare part in a general asset account, the taxpayer can dispose of the rotable, temporary, or standby emergency spare part by transferring it to a supplies account only if the taxpayer has obtained the consent of the Commissioner to revoke the election. If a taxpayer made an election under to treat the cost of any material and supply (as defined in ) as a capital expenditure subject to the allowance for depreciation and also made an election under of this section to include that material and supply in a general asset account, the taxpayer can dispose of the material and supply by transferring it to a supplies account only if the taxpayer has obtained the consent of the Commissioner to revoke the election. See for the procedures for revoking a or a election.
(vii) Leasehold improvements The rules of of this section also apply to—
(A) A lessor of leased property that made an improvement to that property for the lessee of the property, has a depreciable basis in the improvement, made an election under of this section to include the improvement in a general asset account, and disposes of the improvement, or disposes of a portion of the improvement as described in of this section, before or upon the termination of the lease with the lessee. See section ; and
(B) A lessee of leased property that made an improvement to that property, has a depreciable basis in the improvement, made an election under of this section to include the improvement in a general asset account, and disposes of the improvement, or disposes of a portion of the improvement as described in of this section, before or upon the termination of the lease.
(viii) Determination of asset disposed of
(A) General rules For purposes of applying of this section to the disposition of an asset in a general asset account, instead of the disposition of the general asset account, the facts and circumstances of each disposition are considered in determining what is the appropriate asset disposed of. The asset for disposition purposes may not consist of items placed in service by the taxpayer on different dates, without taking into account the applicable convention. For purposes of determining what is the appropriate asset disposed of, the unit of property determination under or in published guidance in the Internal Revenue Bulletin under section (see ) and the distinct asset determination under do not apply.
(B) Special rules In addition to the general rules in of this section, the following rules apply for purposes of applying of this section to the disposition of an asset in a general asset account instead of the disposition of the general asset account:
(1) Each building, including its structural components, is the asset, except as provided in or in or of this section.
(2) If a building has two or more condominium or cooperative units, each condominium or cooperative unit, including its structural components, is the asset, except as provided in or in of this section.
(3) If a taxpayer properly includes an item in one of the asset classes 00.11 through 00.4 of Rev. Proc. 87-56 (1987-2 CB 674) (see ) or properly classifies an item in one of the categories under section , except for a category that includes buildings or structural components (for example, retail motor fuels outlet, qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property), each item is the asset, provided that of this section does not apply to the item. For example, each desk is the asset, each computer is the asset, and each qualified smart electric meter is the asset.
(4) If the taxpayer places in service an improvement or addition to an asset after the taxpayer placed the asset in service, the improvement or addition and, if applicable, its structural components are a separate asset.
(ix) Examples The following examples illustrate the application of this :
Example 1. A, a calendar-year partnership, maintains one general asset account for one office building that cost $10 million. A discovers a leak in the roof of the building and decides to replace the entire roof. The roof is a structural component of the building. In accordance with of this section, the office building, including its structural components, is the asset for disposition purposes. The retirement of the replaced roof is not a disposition of a portion of an asset as described in of this section. Thus, the retirement of the replaced roof is not a disposition under of this section. As a result, A continues to depreciate the $10 million cost of the general asset account. If A must capitalize the amount paid for the replacement roof pursuant to , the replacement roof is a separate asset for disposition purposes pursuant to of this section and for depreciation purposes pursuant to section .
Example 2. B, a calendar-year commercial airline company, maintains one general asset account for five aircraft that cost a total of $500 million. These aircraft are described in asset class 45.0 of Rev. Proc. 87-56. B replaces the existing engines on one of the aircraft with new engines. Assume each aircraft is a unit of property as determined under and each engine of an aircraft is a major component or substantial structural part of the aircraft as determined under . Assume also that B treats each aircraft as the asset for disposition purposes in accordance with of this section. The retirement of the replaced engines is not a disposition of a portion of an asset as described in of this section. Thus, the retirement of the replaced engines is not a disposition under of this section. As a result, B continues to depreciate the $500 million cost of the general asset account. If B must capitalize the amount paid for the replacement engines pursuant to , the replacement engines are a separate asset for disposition purposes pursuant to of this section and for depreciation purposes pursuant to section .
Example 3.
(i) R, a calendar-year corporation, maintains one general asset account for ten machines. The machines cost a total of $10,000 and are placed in service in June 2014. Of the ten machines, one machine costs $8,200 and nine machines cost a total of $1,800. Assume R depreciates this general asset account using the optional depreciation table that corresponds with the general depreciation system, the 200-percent declining balance method, a 5-year recovery period, and a half-year convention. R does not make a section election for any of the machines, and all of the machines are not eligible for any additional first year depreciation deduction. As of January 1, 2015, the depreciation reserve of the account is $2,000 ($10,000 × 20%).
(ii) On February 8, 2015, R sells the machine that cost $8,200 to an unrelated party for $9,000. Under of this section, this machine has an adjusted depreciable basis of zero.
(iii) On its 2015 tax return, R recognizes the amount realized of $9,000 as ordinary income because such amount does not exceed the unadjusted depreciable basis of the general asset account ($10,000), plus any expensed cost for assets in the account ($0), less amounts previously recognized as ordinary income ($0). Moreover, the unadjusted depreciable basis and depreciation reserve of the account are not affected by the disposition of the machine. Thus, the depreciation allowance for the account in 2015 is $3,200 ($10,000 × 32%).
Example 4.
(i) The facts are the same as in Example 3. In addition, on June 4, 2016, R sells seven machines to an unrelated party for a total of $1,100. In accordance with of this section, these machines have an adjusted depreciable basis of zero.
(ii) On its 2016 tax return, R recognizes $1,000 as ordinary income (the unadjusted depreciable basis of $10,000, plus the expensed cost of $0, less the amount of $9,000 previously recognized as ordinary income). The recognition and character of the excess amount realized of $100 ($1,100−$1,000) are determined under applicable provisions of the Code other than section (such as section ). Moreover, the unadjusted depreciable basis and depreciation reserve of the account are not affected by the disposition of the machines. Thus, the depreciation allowance for the account in 2016 is $1,920 ($10,000 × 19.2%).
(3) Special rules
(i) In general This provides the rules for terminating general asset account treatment upon certain dispositions. While the rules under and of this section are optional rules, the rules under , , , and of this section are mandatory rules. A taxpayer elects to apply or of this section by reporting the gain, loss, or other deduction on the taxpayer's timely filed original Federal tax return, including extensions, for the taxable year in which the disposition occurs. However, if the loss is on account of the demolition of a structure to which section and apply, a taxpayer elects to apply or of this section by ending depreciation for the structure at the time of the disposition of the structure, taking into account the convention applicable to the general asset account in which the demolished structure was included, and reporting the amount of depreciation for that structure for the taxable year in which the disposition occurs on the taxpayer's timely filed original Federal tax return, including extensions, for that taxable year. A taxpayer may revoke the election to apply or of this section only by filing a request for a private letter ruling and obtaining the Commissioner's consent to revoke the election. The Commissioner may grant a request to revoke this election if the taxpayer acted reasonably and in good faith, and the revocation will not prejudice the interests of the Government. See generally . The election to apply or of this section may not be made or revoked through the filing of an application for change in accounting method. For purposes of applying through of this section, see of this section for identifying an asset disposed of and its unadjusted depreciable basis. Solely for purposes of applying , , , and of this section, the term asset is:
(A) The asset as determined under of this section; or
(B) The portion of such asset that is disposed of in a disposition described in of this section.
(ii) Disposition of all assets remaining in a general asset account
(A) Optional termination of a general asset account Upon the disposition of all of the assets, the last asset, or the remaining portion of the last asset in a general asset account, a taxpayer may apply this to recover the adjusted depreciable basis of the general asset account rather than having of this section apply. Under this , the general asset account terminates and the amount of gain or loss for the general asset account is determined under section by taking into account the adjusted depreciable basis of the general asset account at the time of the disposition, as determined under the applicable convention for the general asset account. Whether and to what extent gain or loss is recognized is determined under other applicable provisions of the Code, including section and . The character of the gain or loss is determined under other applicable provisions of the Code, except that the amount of gain subject to section is limited to the excess of the depreciation allowed or allowable for the general asset account, including any expensed cost, over any amounts previously recognized as ordinary income under of this section, and the amount of gain subject to section is limited to the excess of the additional depreciation allowed or allowable for the general asset account, over any amounts previously recognized as ordinary income under of this section.
(B) Examples The following examples illustrate the application of this :
Example 1.
(i) T, a calendar-year corporation, maintains a general asset account for 1,000 calculators. The calculators cost a total of $60,000 and are placed in service in 2014. Assume T depreciates this general asset account using the optional depreciation table that corresponds with the general depreciation system, the 200-percent declining balance method, a 5-year recovery period, and a half-year convention. T does not make a section election for any of the calculators, and all of the calculators are not eligible for any additional first year depreciation deduction. In 2015, T sells 200 of the calculators to an unrelated party for a total of $10,000 and recognizes the $10,000 as ordinary income in accordance with of this section.
(ii) On March 26, 2016, T sells the remaining calculators in the general asset account to an unrelated party for $35,000. T elects to apply of this section. As a result, the account terminates and gain or loss is determined for the account.
(iii) On the date of disposition, the adjusted depreciable basis of the account is $23,040 (unadjusted depreciable basis of $60,000 less the depreciation allowed or allowable of $36,960). Thus, in 2016, T recognizes gain of $11,960 (amount realized of $35,000 less the adjusted depreciable basis of $23,040). The gain of $11,960 is subject to section to the extent of the depreciation allowed or allowable for the account, plus the expensed cost for assets in the account, less the amounts previously recognized as ordinary income ($36,960 + $0 − $10,000 = $26,960). As a result, the entire gain of $11,960 is subject to section .
Example 2.
(i) J, a calendar-year corporation, maintains a general asset account for one item of equipment. This equipment costs $2,000 and is placed in service in 2014. Assume J depreciates this general asset account using the optional depreciation table that corresponds with the general depreciation system, the 200-percent declining balance method, a 5-year recovery period, and a half-year convention. J does not make a section election for the equipment, and it is not eligible for any additional first year depreciation deduction. In June 2016, J sells the equipment to an unrelated party for $1,000. J elects to apply of this section. As a result, the account terminates and gain or loss is determined for the account.
(ii) On the date of disposition, the adjusted depreciable basis of the account is $768 (unadjusted depreciable basis of $2,000 less the depreciation allowed or allowable of $1,232). Thus, in 2016, J recognizes gain of $232 (amount realized of $1,000 less the adjusted depreciable basis of $768). The gain of $232 is subject to section to the extent of the depreciation allowed or allowable for the account, plus the expensed cost for assets in the account, less the amounts previously recognized as ordinary income ($1,232 + $0 − $0 = $1,232).As a result, the entire gain of $232 is subject to section .
(iii) Disposition of an asset in a qualifying disposition
(A) Optional determination of the amount of gain, loss, or other deduction In the case of a qualifying disposition (described in of this section) of an asset, a taxpayer may elect to apply this rather than having of this section apply. Under this , general asset account treatment for the asset terminates as of the first day of the taxable year in which the qualifying disposition occurs, and the amount of gain, loss, or other deduction for the asset is determined under by taking into account the asset's adjusted depreciable basis at the time of the disposition. The adjusted depreciable basis of the asset at the time of the disposition, as determined under the applicable convention for the general asset account in which the asset was included, equals the unadjusted depreciable basis of the asset less the greater of the depreciation allowed or allowable for the asset. The allowable depreciation is computed by using the depreciation method, recovery period, and convention applicable to the general asset account in which the asset was included and by including the portion of the additional first year depreciation deduction claimed for the general asset account that is attributable to the asset disposed of. Whether and to what extent gain, loss, or other deduction is recognized is determined under other applicable provisions of the Code, including section and . The character of the gain, loss, or other deduction is determined under other applicable provisions of the Code, except that the amount of gain subject to section or section is limited to the lesser of—
(1) The depreciation allowed or allowable for the asset, including any expensed cost or, in the case of section property, the additional depreciation allowed or allowable for the asset; or
(2) The excess of—
(i) The original unadjusted depreciable basis of the general asset account plus, in the case of section property originally included in the general asset account, any expensed cost; over
(ii) The cumulative amounts of gain previously recognized as ordinary income under either of this section or section or section .
(B) Qualifying dispositions A qualifying disposition is a disposition that does not involve all the assets, the last asset, or the remaining portion of the last asset remaining in a general asset account and that is—
(1) A direct result of a fire, storm, shipwreck, or other casualty, or from theft;
(2) A charitable contribution for which a deduction is allowable under section ;
(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; or
(4) A transaction, other than a transaction described in paragraph (e)(3)(iv) (pertaining to transactions subject to section ), paragraph (e)(3)(v) (pertaining to transactions subject to section or section ), paragraph (e)(3)(vi) (pertaining to technical terminations of partnerships), or paragraph (e)(3)(vii) (anti-abuse rule) of this section, to which a nonrecognition section of the Internal Revenue Code applies (determined without regard to this section).
(C) Effect of a qualifying disposition on a general asset account If the taxpayer elects to apply this to a qualifying disposition of an asset, then—
(1) The asset is removed from the general asset account as of the first day of the taxable year in which the qualifying disposition occurs. For that taxable year, the taxpayer accounts for the asset in a single asset account in accordance with the rules under ;
(2) The unadjusted depreciable basis of the general asset account is reduced by the unadjusted depreciable basis of the asset as of the first day of the taxable year in which the disposition occurs;
(3) The depreciation reserve of the general asset account is reduced by the greater of the depreciation allowed or allowable for the asset as of the end of the taxable year immediately preceding the year of disposition. The allowable depreciation is computed by using the depreciation method, recovery period, and convention applicable to the general asset account in which the asset was included and by including the portion of the additional first year depreciation deduction claimed for the general asset account that is attributable to the asset disposed of; and
(4) For purposes of determining the amount of gain realized on subsequent dispositions that is subject to ordinary income treatment under of this section, the amount of any expensed cost with respect to the asset is disregarded.
(D) Examples The following examples illustrate the application of this :
Example 1.
(i) Z, a calendar-year corporation, maintains one general asset account for 12 machines. Each machine costs $15,000 and is placed in service in 2014. Of the 12 machines, nine machines that cost a total of $135,000 are used in Z's Kentucky plant, and three machines that cost a total of $45,000 are used in Z's Ohio plant. Assume Z depreciates this general asset account using the optional depreciation table that corresponds with the general depreciation system, the 200-percent declining balance method, a 5-year recovery period, and the half-year convention. Z does not make a section election for any of the machines, and all of the machines are not eligible for any additional first year depreciation deduction. As of December 31, 2015, the depreciation reserve for the account is $93,600.
(ii) On May 27, 2016, Z sells its entire manufacturing plant in Ohio to an unrelated party. The sales proceeds allocated to each of the three machines at the Ohio plant is $5,000. This transaction is a qualifying disposition under of this section, and Z elects to apply of this section.
(iii) For Z's 2016 return, the depreciation allowance for the account is computed as follows. As of December 31, 2015, the depreciation allowed or allowable for the three machines at the Ohio plant is $23,400. Thus, as of January 1, 2016, the unadjusted depreciable basis of the account is reduced from $180,000 to $135,000 ($180,000 less the unadjusted depreciable basis of $45,000 for the three machines), and, as of December 31, 2015, the depreciation reserve of the account is decreased from $93,600 to $70,200 ($93,600 less the depreciation allowed or allowable of $23,400 for the three machines as of December 31, 2015). Consequently, the depreciation allowance for the account in 2016 is $25,920 ($135,000 × 19.2%).
(iv) For Z's 2016 return, gain or loss for each of the three machines at the Ohio plant is determined as follows. The depreciation allowed or allowable in 2016 for each machine is $1,440 (($15,000 × 19.2%)/2). Thus, the adjusted depreciable basis of each machine under section is $5,760 (the adjusted depreciable basis of $7,200 removed from the account less the depreciation allowed or allowable of $1,440 in 2016). As a result, the loss recognized in 2016 for each machine is $760 ($5,000 − $5,760), which is subject to section .
Example 2.
(i) A, a calendar-year partnership, maintains one general asset account for one office building that cost $20 million and was placed in service in July 2011. A depreciates this general asset account using the optional depreciation table that corresponds with the general depreciation system, the straight-line method, a 39-year recovery period, and the mid-month convention. As of January 1, 2014, the depreciation reserve for the account is $1,261,000.
(ii) In May 2014, a tornado occurs where the building is located and damages the roof of the building. A decides to replace the entire roof. The roof is replaced in June 2014. The roof is a structural component of the building. Because the roof was damaged as a result of a casualty event described in section , the partial disposition rule provided under of this section applies to the roof. Although the office building, including its structural components, is the asset for disposition purposes, the partial disposition rule provides that the retirement of the replaced roof is a disposition under of this section. This retirement is a qualifying disposition under of this section, and A elects to apply of this section for the retirement of the damaged roof.
(iii) Of the $20 million cost of the office building, assume $1 million is the cost of the retired roof.
(iv) For A's 2014 return, the depreciation allowance for the account is computed as follows. As of December 31, 2013, the depreciation allowed or allowable for the retired roof is $63,050. Thus, as of January 1, 2014, the unadjusted depreciable basis of the account is reduced from $20,000,000 to $19,000,000 ($20,000,000 less the unadjusted depreciable basis of $1,000,000 for the retired roof), and the depreciation reserve of the account is decreased from $1,261,000 to $1,197,950 ($1,261,000 less the depreciation allowed or allowable of $63,050 for the retired roof as of December 31, 2013). Consequently, the depreciation allowance for the account in 2014 is $487,160 ($19,000,000 × 2.564%).
(v) For A's 2014 return, gain or loss for the retired roof is determined as follows. The depreciation allowed or allowable in 2014 for the retired roof is $11,752 (($1,000,000 × 2.564%) × 5.5/12). Thus, the adjusted depreciable basis of the retired roof under section is $925,198 (the adjusted depreciable basis of $936,950 removed from the account less the depreciation allowed or allowable of $11,752 in 2014). As a result, the loss recognized in 2014 for the retired roof is $925,198, which is subject to section .
(vi) If A must capitalize the amount paid for the replacement roof under , the replacement roof is a separate asset for depreciation purposes pursuant to section . If A includes the replacement roof in a general asset account, the replacement roof is a separate asset for disposition purposes pursuant to of this section. If A includes the replacement roof in a single asset account or a multiple asset account under , the replacement roof is a separate asset for disposition purposes pursuant to .
(iv) Transactions subject to section 168(i)(7)
(A) In general If a taxpayer transfers one or more assets, or a portion of such asset, in a general asset account in a transaction described in section (pertaining to treatment of transferees in certain nonrecognition transactions), the taxpayer (the transferor) and the transferee must apply this to the asset or the portion of such asset, instead of applying , , or of this section. The transferee is bound by the transferor's election under of this section for the portion of the transferee's basis in the asset or the portion of such asset that does not exceed the transferor's adjusted depreciable basis of the general asset account or the asset or the portion of such asset, as applicable, as determined under or of this section, as applicable.
(B) All assets remaining in general asset account are transferred If a taxpayer transfers all the assets, the last asset, or the remaining portion of the last asset in a general asset account in a transaction described in section —
(1) The taxpayer (the transferor) must terminate the general asset account on the date of the transfer. The allowable depreciation deduction for the general asset account for the transferor's taxable year in which the section transaction occurs is computed by using the depreciation method, recovery period, and convention applicable to the general asset account. This allowable depreciation deduction is allocated between the transferor and the transferee on a monthly basis. This allocation is made in accordance with the rules in for allocating the depreciation deduction between the transferor and the transferee;
(2) The transferee must establish a new general asset account for all the assets, the last asset, or the remaining portion of the last asset, in the taxable year in which the section transaction occurs for the portion of its basis in the assets that does not exceed the transferor's adjusted depreciable basis of the general asset account in which all the assets, the last asset, or the remaining portion of the last asset, were included. The transferor's adjusted depreciable basis of this general asset account is equal to the adjusted depreciable basis of that account as of the beginning of the transferor's taxable year in which the transaction occurs, decreased by the amount of depreciation allocable to the transferor for the year of the transfer, as determined under of this section. The transferee is treated as the transferor for purposes of computing the allowable depreciation deduction for the new general asset account under section . The new general asset account must be established in accordance with the rules in of this section, except that the unadjusted depreciable bases of all the assets, the last asset, or the remaining portion of the last asset, and the greater of the depreciation allowed or allowable for all the assets, the last asset, or the remaining portion of the last asset, including the amount of depreciation for the transferred assets that is allocable to the transferor for the year of the transfer, are included in the newly established general asset account. Consequently, this general asset account in the year of the transfer will have a beginning balance for both the unadjusted depreciable basis and the depreciation reserve of the general asset account; and
(3) For purposes of section and this section, the transferee treats the portion of its basis in the assets that exceeds the transferor's adjusted depreciable basis of the general asset account in which all the assets, the last asset, or the remaining portion of the last asset, were included, as determined under of this section, as a separate asset that the transferee placed in service on the date of the transfer. The transferee accounts for this asset under or may make an election under of this section to include the asset in a general asset account.
(C) Not all assets remaining in general asset account are transferred If a taxpayer transfers an asset in a general asset account in a transaction described in section and if of this section does not apply to this asset—
(1) The taxpayer (the transferor) must remove the transferred asset from the general asset account in which the asset is included, as of the first day of the taxable year in which the section transaction occurs. In addition, the adjustments to the general asset account described in through of this section must be made. The allowable depreciation deduction for the asset for the transferor's taxable year in which the section transaction occurs is computed by using the depreciation method, recovery period, and convention applicable to the general asset account in which the asset was included. This allowable depreciation deduction is allocated between the transferor and the transferee on a monthly basis. This allocation is made in accordance with the rules in for allocating the depreciation deduction between the transferor and the transferee;
(2) The transferee must establish a new general asset account for the asset in the taxable year in which the section transaction occurs for the portion of its basis in the asset that does not exceed the transferor's adjusted depreciable basis of the asset. The transferor's adjusted depreciable basis of this asset is equal to the adjusted depreciable basis of the asset as of the beginning of the transferor's taxable year in which the transaction occurs, decreased by the amount of depreciation allocable to the transferor for the year of the transfer, as determined under of this section. The transferee is treated as the transferor for purposes of computing the allowable depreciation deduction for the new general asset account under section . The new general asset account must be established in accordance with the rules in of this section, except that the unadjusted depreciable basis of the asset, and the greater of the depreciation allowed or allowable for the asset, including the amount of depreciation for the transferred asset that is allocable to the transferor for the year of the transfer, are included in the newly established general asset account. Consequently, this general asset account in the year of the transfer will have a beginning balance for both the unadjusted depreciable basis and the depreciation reserve of the general asset account; and
(3) For purposes of section and this section, the transferee treats the portion of its basis in the asset that exceeds the transferor's adjusted depreciable basis of the asset, as determined under of this section, as a separate asset that the transferee placed in service on the date of the transfer. The transferee accounts for this asset under or may make an election under of this section to include the asset in a general asset account.
(v) Transactions subject to section 1031 or section 1033
(A) Like-kind exchange or involuntary conversion of all assets remaining in a general asset account If all the assets, the last asset, or the remaining portion of the last asset in a general asset account are transferred by a taxpayer in a like-kind exchange (as defined under ) or in an involuntary conversion (as defined under ), the taxpayer must apply this instead of applying , , or of this section. Under this , the general asset account terminates as of the first day of the year of disposition (as defined in ) and—
(1) The amount of gain or loss for the general asset account is determined under section by taking into account the adjusted depreciable basis of the general asset account at the time of disposition (as defined in ). The depreciation allowance for the general asset account in the year of disposition is determined in the same manner as the depreciation allowance for the relinquished MACRS property (as defined in ) in the year of disposition is determined under . The recognition and character of gain or loss are determined in accordance with of this section, notwithstanding that of this section is an optional rule; and
(2) The adjusted depreciable basis of the general asset account at the time of disposition is treated as the adjusted depreciable basis of the relinquished MACRS property.
(B) Like-kind exchange or involuntary conversion of less than all assets remaining in a general asset account If an asset in a general asset account is transferred by a taxpayer in a like-kind exchange or in an involuntary conversion and if of this section does not apply to this asset, the taxpayer must apply this instead of applying , , or of this section. Under this , general asset account treatment for the asset terminates as of the first day of the year of disposition (as defined in ), and—
(1) The amount of gain or loss for the asset is determined by taking into account the asset's adjusted depreciable basis at the time of disposition (as defined in ). The adjusted depreciable basis of the asset at the time of disposition equals the unadjusted depreciable basis of the asset less the greater of the depreciation allowed or allowable for the asset. The allowable depreciation is computed by using the depreciation method, recovery period, and convention applicable to the general asset account in which the asset was included and by including the portion of the additional first year depreciation deduction claimed for the general asset account that is attributable to the relinquished asset. The depreciation allowance for the asset in the year of disposition is determined in the same manner as the depreciation allowance for the relinquished MACRS property (as defined in ) in the year of disposition is determined under . The recognition and character of the gain or loss are determined in accordance with of this section, notwithstanding that of this section is an optional rule; and
(2) As of the first day of the year of disposition, the taxpayer must remove the relinquished asset from the general asset account and make the adjustments to the general asset account described in through of this section.
(vi) Technical termination of a partnership In the case of a technical termination of a partnership under section , the terminated partnership must apply this instead of applying , , or of this section. Under this , all of the terminated partnership's general asset accounts terminate as of the date of its termination under section . The terminated partnership computes the allowable depreciation deduction for each of its general asset accounts for the taxable year in which the technical termination occurs by using the depreciation method, recovery period, and convention applicable to the general asset account. The new partnership is not bound by the terminated partnership's election under of this section.
(vii) Anti-abuse rule
(A) In general If an asset in a general asset account is disposed of by a taxpayer in a transaction described in of this section, general asset account treatment for the asset terminates as of the first day of the taxable year in which the disposition occurs. Consequently, the taxpayer must determine the amount of gain, loss, or other deduction attributable to the disposition in the manner described in of this section, notwithstanding that of this section is an optional rule, and must make the adjustments to the general asset account described in through of this section.
(B) Abusive transactions A transaction is described in this if the transaction is not described in , , or of this section, and if the transaction is entered into, or made, with a principal purpose of achieving a tax benefit or result that would not be available absent an election under this section. Examples of these types of transactions include—
(1) A transaction entered into with a principal purpose of shifting income or deductions among taxpayers in a manner that would not be possible absent an election under this section to take advantage of differing effective tax rates among the taxpayers; or
(2) An election made under this section with a principal purpose of disposing of an asset from a general asset account to utilize an expiring net operating loss or credit if the transaction is not a bona fide disposition. The fact that a taxpayer with a net operating loss carryover or a credit carryover transfers an asset to a related person or transfers an asset pursuant to an arrangement where the asset continues to be used or is available for use by the taxpayer pursuant to a lease or otherwise indicates, absent strong evidence to the contrary, that the transaction is described in this .
(f) Assets generating foreign source income
(1) In general This provides the rules for determining the source of any income, gain, or loss recognized, and the appropriate section separate limitation category or categories for any foreign source income, gain, or loss recognized on a disposition (within the meaning of of this section) of an asset in a general asset account that consists of assets generating both United States and foreign source income. These rules apply only to a disposition to which paragraph (e)(2) (general disposition rules), paragraph (e)(3)(ii) (disposition of all assets remaining in a general asset account), paragraph (e)(3)(iii) (disposition of an asset in a qualifying disposition), paragraph (e)(3)(v) (transactions subject to section or section ), or paragraph (e)(3)(vii) (anti-abuse rule) of this section applies. Solely for purposes of applying this , the term asset is:
(i) The asset as determined under of this section; or
(ii) The portion of such asset that is disposed of in a disposition described in of this section.
(2) Source of ordinary income, gain, or loss
(i) Source determined by allocation and apportionment of depreciation allowed The amount of any ordinary income, gain, or loss that is recognized on the disposition of an asset in a general asset account must be apportioned between United States and foreign sources based on the allocation and apportionment of the—
(A) Depreciation allowed for the general asset account as of the end of the taxable year in which the disposition occurs if of this section applies to the disposition;
(B) Depreciation allowed for the general asset account as of the time of disposition if the taxpayer applies of this section to the disposition of all assets, the last asset, or the remaining portion of the last asset, in the general asset account, or if all the assets, the last asset, or the remaining portion of the last asset, in the general asset account are disposed of in a transaction described in of this section; or
(C) Depreciation allowed for the asset disposed of for only the taxable year in which the disposition occurs if the taxpayer applies of this section to the disposition of the asset in a qualifying disposition, if the asset is disposed of in a transaction described in of this section (like-kind exchange or involuntary conversion), or if the asset is disposed of in a transaction described in of this section (anti-abuse rule).
(ii) Formula for determining foreign source income, gain, or loss The amount of ordinary income, gain, or loss recognized on the disposition that shall be treated as foreign source income, gain, or loss must be determined under the formula in this . For purposes of this formula, the allowed depreciation deductions are determined for the applicable time period provided in of this section. The formula is:
| Foreign Source Income, Gain, or Loss from The Disposition of an Asset | = | Total Ordinary Income, Gain, or Loss from the Disposition of an Asset | X | Allowed Depreciation Deductions Allocated and Apportioned to Foreign Source Income/Total Allowed Depreciation Deductions for the General Asset Account or for the Asset Disposed of (as applicable). |
(3) Section 904(d) separate categories If the assets in the general asset account generate foreign source income in more than one separate category under section or another section of the Code (for example, income treated as foreign source income under section ), or under a United States income tax treaty that requires the foreign tax credit limitation to be determined separately for specified types of income, the amount of foreign source income, gain, or loss from the disposition of an asset, as determined under the formula in of this section, must be allocated and apportioned to the applicable separate category or categories under the formula in this . For purposes of this formula, the allowed depreciation deductions are determined for the applicable time period provided in of this section. The formula is:
| Foreign Source Income, Gain, or Loss in a Separate Category | = | Foreign Source Income, Gain, or Loss from The Disposition of an Asset | X | Allowed Depreciation Deductions Allocated and Apportioned to a Separate Category/Total Allowed Depreciation Deductions and Apportioned to Foreign Source Income. |
(g) Assets subject to recapture If the basis of an asset in a general asset account is increased as a result of the recapture of any allowable credit or deduction (for example, the basis adjustment for the recapture amount under section , , , , , , or 1400N(d)(5)), general asset account treatment for the asset terminates as of the first day of the taxable year in which the recapture event occurs. Consequently, the taxpayer must remove the asset from the general asset account as of that day and must make the adjustments to the general asset account described in through of this section.
(h) Changes in use
(1) Conversion to any personal use An asset in a general asset account becomes ineligible for general asset account treatment if a taxpayer uses the asset in any personal activity during a taxable year. Upon a conversion to any personal use, the taxpayer must remove the asset from the general asset account as of the first day of the taxable year in which the change in use occurs (the year of change) and must make the adjustments to the general asset account described in through of this section.
(2) Change in use results in a different recovery period and/or depreciation method
(i) No effect on general asset account election A change in the use described in (change in use results in a different recovery period or depreciation method) of an asset in a general asset account shall not cause or permit the revocation of the election made under this section.
(ii) Asset is removed from the general asset account Upon a change in the use described in , the taxpayer must remove the asset from the general asset account as of the first day of the year of change (as defined in ) and must make the adjustments to the general asset account described in through of this section. If, however, the result of the change in use is described in (change in use results in a shorter recovery period or a more accelerated depreciation method) and the taxpayer elects to treat the asset as though the change in use had not occurred pursuant to , no adjustment is made to the general asset account upon the change in use.
(iii) New general asset account is established
(A) Change in use results in a shorter recovery period or a more accelerated depreciation method If the result of the change in use is described in (change in use results in a shorter recovery period or a more accelerated depreciation method) and adjustments to the general asset account are made pursuant to of this section, the taxpayer must establish a new general asset account for the asset in the year of change in accordance with the rules in of this section, except that the adjusted depreciable basis of the asset as of the first day of the year of change is included in the general asset account. For purposes of of this section, the applicable depreciation method, recovery period, and convention are determined under .
(B) Change in use results in a longer recovery period or a slower depreciation method If the result of the change in use is described in (change in use results in a longer recovery period or a slower depreciation method), the taxpayer must establish a separate general asset account for the asset in the year of change in accordance with the rules in of this section, except that the unadjusted depreciable basis of the asset, and the greater of the depreciation of the asset allowed or allowable in accordance with section , as of the first day of the year of change are included in the newly established general asset account. Consequently, this general asset account as of the first day of the year of change will have a beginning balance for both the unadjusted depreciable basis and the depreciation reserve of the general asset account. For purposes of of this section, the applicable depreciation method, recovery period, and convention are determined under .
(i) Redetermination of basis If, after the placed-in-service year, the unadjusted depreciable basis of an asset in a general asset account is redetermined due to a transaction other than that described in of this section (for example, due to contingent purchase price or discharge of indebtedness), the taxpayer's election under of this section for the asset also applies to the increase or decrease in basis resulting from the redetermination. For the taxable year in which the increase or decrease in basis occurs, the taxpayer must establish a new general asset account for the amount of the increase or decrease in basis in accordance with the rules in of this section. For purposes of of this section, the applicable recovery period for the increase or decrease in basis is the recovery period of the asset remaining as of the beginning of the taxable year in which the increase or decrease in basis occurs, the applicable depreciation method and applicable convention for the increase or decrease in basis are the same depreciation method and convention applicable to the asset that applies for the taxable year in which the increase or decrease in basis occurs, and the increase or decrease in basis is deemed to be placed in service in the same taxable year as the asset.
(j) Identification of disposed or converted asset
(1) In general The rules of this apply when an asset in a general asset account is disposed of or converted in a transaction described in paragraph (e)(3)(iii) (disposition of an asset in a qualifying disposition), paragraph (e)(3)(iv)(B) (transactions subject to section ), paragraph (e)(3)(v)(B) (transactions subject to section or section ), paragraph (e)(3)(vii) (anti-abuse rule), paragraph (g) (assets subject to recapture), or paragraph (h)(1) (conversion to any personal use) of this section.
(2) Identifying which asset is disposed of or converted
(i) In general For purposes of identifying which asset in a general asset account is disposed of or converted, a taxpayer must identify the disposed of or converted asset by using—
(A) The specific identification method of accounting. Under this method of accounting, the taxpayer can determine the particular taxable year in which the disposed of or converted asset was placed in service by the taxpayer;
(B) A first-in, first-out method of accounting if the taxpayer can readily determine from its records the total dispositions of assets with the same recovery period during the taxable year but the taxpayer cannot readily determine from its records the unadjusted depreciable basis of the disposed of or converted asset. Under this method of accounting, the taxpayer identifies the general asset account with the earliest placed-in-service year that has the same recovery period as the disposed of or converted asset and that has assets at the beginning of the taxable year of the disposition or conversion, and the taxpayer treats the disposed of or converted asset as being from that general asset account. To determine which general asset account has assets at the beginning of the taxable year of the disposition or conversion, the taxpayer reduces the number of assets originally included in the account by the number of assets disposed of or converted in any prior taxable year in a transaction to which this applies;
(C) A modified first-in, first-out method of accounting if the taxpayer can readily determine from its records the total dispositions of assets with the same recovery period during the taxable year and the unadjusted depreciable basis of the disposed of or converted asset. Under this method of accounting, the taxpayer identifies the general asset account with the earliest placed-in-service year that has the same recovery period as the disposed of or converted asset and that has assets at the beginning of the taxable year of the disposition or conversion with the same unadjusted depreciable basis as the disposed of or converted asset, and the taxpayer treats the disposed of or converted asset as being from that general asset account. To determine which general asset account has assets at the beginning of the taxable year of the disposition or conversion, the taxpayer reduces the number of assets originally included in the account by the number of assets disposed of or converted in any prior taxable year in a transaction to which this applies;
(D) A mortality dispersion table if the asset is a mass asset accounted for in a separate general asset account in accordance with of this section and if the taxpayer can readily determine from its records the total dispositions of assets with the same recovery period during the taxable year. The mortality dispersion table must be based upon an acceptable sampling of the taxpayer's actual disposition and conversion experience for mass assets or other acceptable statistical or engineering techniques. To use a mortality dispersion table, the taxpayer must adopt recordkeeping practices consistent with the taxpayer's prior practices and consonant with good accounting and engineering practices; or
(E) Any other method as the Secretary may designate by publication in the Federal Register or in the Internal Revenue Bulletin (see ) on or after September 19, 2013. See of this section regarding the last-in, first-out method of accounting.
(ii) Disposition of a portion of an asset If a taxpayer disposes of a portion of an asset and of this section applies to that disposition, the taxpayer may identify the asset by using any applicable method provided in of this section, after taking into account of this section.
(iii) Last-in, first-out method of accounting For purposes of of this section, a last-in, first-out method of accounting may not be used. Examples of a last-in, first-out method of accounting include the taxpayer identifying the general asset account with the most recent placed-in-service year that has the same recovery period as the disposed of or converted asset and that has assets at the beginning of the taxable year of the disposition or conversion, and the taxpayer treating the disposed of or converted asset as being from that general asset account, or the taxpayer treating the disposed portion of an asset as being from the general asset account with the most recent placed-in-service year that has assets that are the same as the asset of which the disposed portion is a part.
(3) Basis of disposed of or converted asset
(i) Solely for purposes of this , the term asset is the asset as determined under of this section or the portion of such asset that is disposed of in a disposition described in of this section. After identifying which asset in a general asset account is disposed of or converted, the taxpayer must determine the unadjusted depreciable basis of, and the depreciation allowed or allowable for, the disposed of or converted asset. If it is impracticable from the taxpayer's records to determine the unadjusted depreciable basis of the disposed of or converted asset, the taxpayer may use any reasonable method that is consistently applied to all assets in the same general asset account for purposes of determining the unadjusted depreciable basis of the disposed of or converted asset in that general asset account. Examples of a reasonable method include, but are not limited to, the following:
(A) If the replacement asset is a restoration (as defined in ), and is not a betterment (as defined in ) or an adaptation to a new or different use (as defined in ), discounting the cost of the replacement asset to its placed-in-service year cost using the Producer Price Index for Finished Goods or its successor, the Producer Price Index for Final Demand, or any other index designated by guidance in the Internal Revenue Bulletin (see ) for purposes of this ;
(B) A pro rata allocation of the unadjusted depreciable basis of the general asset account based on the replacement cost of the disposed asset and the replacement cost of all of the assets in the general asset account; and
(C) A study allocating the cost of the asset to its individual components.
(ii) The depreciation allowable for the disposed of or converted asset is computed by using the depreciation method, recovery period, and convention applicable to the general asset account in which the disposed of or converted asset was included and by including the additional first year depreciation deduction claimed for the disposed of or converted asset.
(k) Effect of adjustments on prior dispositions The adjustments to a general asset account under , , , , , or of this section have no effect on the recognition and character of prior dispositions subject to of this section.
(l) Election
(1) Irrevocable election If a taxpayer makes an election under this , the taxpayer consents to, and agrees to apply, all of the provisions of this section to the assets included in a general asset account. Except as provided in , , , or of this section or except as otherwise expressly provided by other guidance published in the Internal Revenue Bulletin (see ), an election made under this section is irrevocable and will be binding on the taxpayer for computing taxable income for the taxable year for which the election is made and for all subsequent taxable years. An election under this is made separately by each person owning an asset to which this section applies (for example, by each member of a consolidated group, at the partnership level and not by the partner separately, or at the S corporation level and not by the shareholder separately).
(l)(2) Time for making election. The election to apply this section shall be made on the taxpayer's timely filed (including extensions) income tax return for the taxable year in which the assets included in the general asset account are placed in service by the taxpayer.
(3) Manner of making election In the year of election, a taxpayer makes the election under this section by typing or legibly printing at the top of the Form 4562, “GENERAL ASSET ACCOUNT ELECTION MADE UNDER SECTION 168(i)(4),” or in the manner provided for on Form 4562 and its instructions. The taxpayer shall maintain records (for example, “General Asset Account #1—all 1995 additions in asset class 00.11 for Salt Lake City, Utah facility”) that identify the assets 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 taxable year upon dispositions from each general asset account. (But see section and for the recordkeeping requirements for section property.) The taxpayer's recordkeeping practices should be consistently applied to the general asset accounts. If Form 4562 is revised or renumbered, any reference in this section to that form shall be treated as a reference to the revised or renumbered form.
(m) Effective/applicability dates
(1) In general Except as provided in of this section, this section applies to taxable years beginning on or after January 1, 2014. Except as provided in , , and of this section, § as contained in 26 CFR part 1 edition revised as of April 1, 2011, applies to taxable years beginning before January 1, 2014.
(2) Early application of this section A taxpayer may choose to apply the provisions of this section to taxable years beginning on or after January 1, 2012.
(3) Early application of regulation project REG-110732-13 A taxpayer may rely on the provisions of this section in regulation project REG-110732-13 (2013-43 IRB 404) (see ) for taxable years beginning on or after January 1, 2012. However, a taxpayer may not rely on the provisions of this section in regulation project REG-110732-13 for taxable years beginning on or after January 1, 2014.
(4) Optional application of TD 9564 A taxpayer may choose to apply § as contained in 26 CFR part 1 edition revised as of April 1, 2014, to taxable years beginning on or after January 1, 2012. However, a taxpayer may not apply § as contained in 26 CFR part 1 edition revised as of April 1, 2014, to taxable years beginning on or after January 1, 2014.
(5) Application of paragraph (e)(2)(viii)(A) The language “and the distinct asset determination under do not apply.” in the last sentence of of this section applies on or after December 2, 2020. of this section as contained in 26 CFR part 1 edition revised as of April 1, 2020, applies before December 2, 2020.
(6) Change in method of accounting A change to comply with this section for depreciable assets placed in service in a taxable year ending on or after December 30, 2003, is a change in method of accounting to which the provisions of section and the regulations under section apply. A taxpayer also may treat a change to comply with this section for depreciable assets placed in service in a taxable year ending before December 30, 2003, as a change in method of accounting to which the provisions of section and the regulations under section apply. This does not apply to a change to comply with , , or of this section, except as otherwise expressly provided by other guidance published in the Internal Revenue Bulletin (see ).
[T.D. 8566, 59 FR 51371, Oct. 11, 1994; 59 FR 64849, Dec. 16, 1994, as amended by T.D. 9115, 69 FR 9534, Mar. 1, 2004; T.D. 9132, 69 FR 33842, June 17, 2004; T.D. 9314, 72 FR 9249, Mar. 1, 2007; T.D. 9564, 76 FR 81086, Dec. 27, 2011; 77 FR 75016, Dec. 19, 2012; T.D. 9689, 79 FR 48667, Aug. 18, 2014; 79 FR 78697, Dec. 31, 2014; T.D. 9935, 85 FR 77378, Dec. 2, 2020]