To simplify MACRS depreciation for many medium and large corporations that purchase large numbers of depreciable assets each and every year, such corporations may place the like assets purchased in the same year into a General Asset Account (GAA) under Code Section 168(i)(4) and depreciate the GAA as if it is a single asset. For example, a corporation that buys 100 computers for $1,000 each can depreciate the purchases as a single asset costing a total of $100,000. However, when an asset is a GAA is disposed of: (a) the taxpayer continues to depreciate the GAA as if the disposition had not occurred; (b) the asset sold is considered to have zero adjusted basis; and (c) any amount realized on disposition of the asset is treated as ordinary income, up to certain limits.
The GAA rules were explained in detail in pre-existing regulations (see Treas. Regs. § 1.168(i)-1), but were significantly revised as part of the IRS’s “repairs vs capitalization” temporary regulations issued in late December of last year. The biggest news is that taxpayers can now elect to terminate GAA treatment for qualifying dispositions under a wider variety of circumstances then under the prior regulations. When a taxpayer makes this election, it removes the asset from the GAA, makes necessary adjustments to the account, and recognizes gain or loss on the asset’s disposition. In effect, taxpayers may get the “best of both worlds”: the ability to treat similar assets as one asset for depreciation purposes, and the flexibility to remove a large asset (or a number of smaller assets) from the account when this option produces a better tax result.