[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.167(a)-7]

[Page 893-894]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
COMPUTATION OF TAXABLE INCOME--Table of Contents
 
Sec. 1.167(a)-7  Accounting for depreciable property.

    (a) Depreciable property may be accounted for by treating each 
individual item as an account, or by combining

[[Page 894]]

two or more assets in a single account. Assets may be grouped in an 
account in a variety of ways. For example, assets similar in kind with 
approximately the same useful lives may be grouped together. Such an 
account is commonly known as a group account. Another appropriate 
grouping might consist of assets segregated according to use without 
regard to useful life, for example, machinery and equipment, furniture 
and fixtures, or transportation equipment. Such an account is commonly 
known as a classified account. A broader grouping, where assets are 
included in the same account regardless of their character or useful 
lives, is commonly referred to as a composite account. For example, all 
the assets used in a business may be included in a single account. 
Group, classified, or composite accounts may be further broken down on 
the basis of location, dates of acquisition, cost, character, use, etc.
    (b) When group, classified, or composite accounts are used with 
average useful lives and a normal retirement occurs, the full cost or 
other basis of the asset retired, unadjusted for depreciation or 
salvage, shall be removed from the asset account and shall be charged to 
the depreciation reserve. Amounts representing salvage ordinarily are 
credited to the depreciation reserve. Where an asset is disposed of for 
reasons other than normal retirement, the full cost or other basis of 
the asset shall be removed from the asset account, and the depreciation 
reserve shall be charged with the depreciation applicable to the retired 
asset. For rules with respect to losses on normal retirements, see 
Sec. 1.167 (a)-8.
    (c) A taxpayer may establish as many accounts for depreciable 
property as he desires. Depreciation allowances shall be computed 
separately for each account. Such depreciation preferably should be 
recorded in a depreciation reserve account; however, in appropriate 
cases it may be recorded directly in the asset account. Where 
depreciation reserves are maintained, a separate reserve account shall 
be maintained for each asset account. The regular books of account or 
permanent auxiliary records shall show for each account the basis of the 
property, including adjustments necessary to conform to the requirements 
of section 1016 and other provisions of law relating to adjustments to 
basis, and the depreciation allowances for tax purposes. In the event 
that reserves for book purposes do not correspond with reserves 
maintained for tax purposes, permanent auxiliary records shall be 
maintained with the regular books of accounts reconciling the 
differences in depreciation for tax and book purposes because of 
different methods of depreciation, bases, rates, salvage, or other 
factors. Depreciation schedules filed with the income tax return shall 
show the accumulated reserves computed in accordance with the allowances 
for income tax purposes.
    (d) In classified or composite accounts, the average useful life and 
rate shall be redetermined whenever additions, retirements, or 
replacements substantially alter the relative proportion of types of 
assets in the accounts. See example (2) in paragraph (b) of 
Sec. 1.167(b)-1 for method of determining the depreciation rate for a 
classified or composite account.