PORTFOLIO

Depreciation: General Concepts; Non-ACRS Rules (Portfolio 530)

Tax Management Portfolio, Depreciation: General Concepts; Non-ACRS Rules, No. 530-4th, should be used as an adjunct to Tax Management Portfolio No. 531, Depreciation: MACRS and ACRS, under which depreciation deductions for most tangible property placed in service after 1980 are determined.

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DESCRIPTION

Tax Management Portfolio, Depreciation: General Concepts; Non-ACRS Rules, No. 530-4th, should be used as an adjunct to Tax Management Portfolio No. 531, Depreciation: MACRS and ACRS, under which depreciation deductions for most tangible property placed in service after 1980 are determined.

 

This Portfolio discusses basic depreciation issues such as what type of property is depreciable, who may take the depreciation deduction, and how to compute the basis of an asset. The Portfolio describes depreciation methods and accounting procedures applied to item and group accounts. The Portfolio also explains the methods and principal rules for computing depreciation on property placed in service before 1981, or otherwise not governed by the ACRS. The latter discussion includes the determination of useful life and salvage value. Finally, the Portfolio analyzes the special election under §169 to amortize the basis of certain pollution control facilities.


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AUTHORS

VICTORIA EVE KELLY
Victoria Eve Kelly graduated cum laude from Barnard College (Columbia University) in 1978 with a B.A. in political science, and received a J.D. from Duke Law School in 1981. Her professional experience includes law, finance and taxation, and she publishes frequently in these areas.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

A. Overview

B. Legislative Revision of § 167

II. What Is Depreciation

Introductory Material

A. Cost Accounting Function

B. Recovery of Investment

C. Provision for Replacement

III. Property Subject to Depreciation

A. In General

B. Tangible Property

C. Intangible Property

1. Pre-1993 RRA

2. 1993 RRA

D. Property Used in Trade or Business or Held for the Production of Income

1. Used in the Trade or Business

2. “Held for the Production of Income”

3. Personal Use

4. Idle Assets and Residential Property Converted to Rental Purposes

IV. Who Can Take Depreciation

A. Owner of Economic Interest

B. Lessors and Lessees

C. Trusts and Estates: Owners of Life Estates and Other Beneficiaries

D. Foreign Corporation and Nonresident Aliens

V. Measurement of Annual Depreciation

Introductory Material

A. Basis, Salvage and Useful Life

B. Methods of Allocation

C. Accounting Procedures

VI. Basis Rules

Introductory Material

A. Cost Basis

1. Purchased Property

2. Constructed Property

3. Foreclosed Property

B. Basis Equal to Fair Market Value

C. Substituted or Carryover Basis

D. Allocation of Purchase Price

E. Adjustments to Basis

1. Depreciation Allowed or Allowable

2. Depreciation Sustained in Years Not Subject to Tax

3. Discharge of Indebtedness

4. Expenditures Chargeable to Capital Account

5. Special Assessments

VII. Useful Life

Introductory Material

A. Determination of Useful Life - Regs. § 1.167(a)-1

1. Factors Affecting Useful Life

2. Obsolescence

3. Effect of Intensive Operations

4. Change in Useful Life

5. Component Method for Depreciating Realty

B. Administrative Guidelines for Determining Useful Life

1. Bulletin F

2. Revenue Procedure 62-21

3. Class Life Asset Depreciation Range System (ADR)

a. Eligible Property

b. Asset Depreciation Range

c. ADR Method of Accounting for Retirements in Multiple Asset Accounts

d. Automatic Change in Method of Computation

e. Optional Averaging Conventions in Year of Addition

f. Optional Repair Allowance

4. Complementary Class Life System

5. Repeal of Asset Depreciation Range System

VIII. Salvage Value

A. Definition

B. Gross Salvage and Net Salvage

C. Reduction in Estimated Salvage Value for Certain Personal Property

D. Application to ADR System

IX. Accounting Procedures

Introductory Material

A. Asset Accounts

B. Depreciation Accounts

1. Depreciation Expense

2. Depreciation Reserve

C. Depreciation Period

1. Beginning of Depreciation Period

2. End of Depreciation Period

3. Partial Year Allowance

4. Averaging Conventions for Group Accounts

a. Half-Year Convention

b. Other Conventions

c. Substantial Distortion

X. Accounting for Retirements

A. In General

B. Normal and Abnormal Retirements

C. Recognition of Gain or Loss on Retirement

D. Basis of Assets Retired

E. Accounting Treatment

1. Retirements

2. Realized Salvage

F. Application to ADR System

XI. Depreciation Methods

A. In General

1. Methods of Computing Depreciation

2. Application of Methods

B. Straight-Line Method

1. Item Accounts

2. Group Accounts

C. Declining Balance Method

1. Item Accounts

2. Group Accounts

3. Residential Rental Property

4. Change in Useful Life

D. Sum of the Years-Digits Method

1. In General

2. Remaining Life Plan

E. Other Methods of Depreciation

1. Unit-of-Production Method

2. Income Forecast Method

a. General

b. Statutory Income Forecast Rules

c. Proposed Regulations

d. Election to Include Participations and Residuals

(1) In General

(2) Procedures for Making the Election

e. Election to Amortize Expenses of Musical Compositions

3. Mileage-Based Method

4. Retirement and Replacement Methods

F. Application to ADR System

XII. Averaging Useful Lives in Order to Determine Rate - Open-End Accounts and Closed Accounts

A. In General

B. Group (Homogeneous) Open-End Accounts

C. Classified and Composite (Heterogeneous) Open-End Accounts

1. Basic Procedure

2. Change in Average Life

D. Closed Accounts

1. Heterogeneous Accounts Closed at End of First Year

2. Heterogeneous Accounts Closed After a Number of Years

3. Closed Homogeneous Accounts

XIII. Choice of Methods and Principles

Introductory Material

A. Maximizing Tax Deductions

1. Advantages of Accelerated Methods Over Straight-Line

2. Advantages of Sum of the Years-Digits Method Over Declining Balance Method

B. Accurate Measurement of Depreciation Expense

XIV. Election and Changes of Method of Depreciation

A. Election of Method

B. Change of Method

1. Changes of Method Requiring Consent

2. Changes Not Requiring Consent

3. Change to Claim Allowable Depreciation Before Disposition of the Asset

a. Automatic Consent Procedure to Claim Allowable Depreciation Before Disposition of an Asset

b. Waiver of Two-Year Rule Barring Change to Claim Allowable Depreciation Before Disposition of an Asset

4. Change to Claim Allowable Depreciation After Disposition of an Asset

XV. Amortization of Pollution Control Facilities (§ 169)

A. Introduction - Planning Considerations

B. Election to Amortize Pollution Control Facilities

C. Facilities That Qualify for Five-Year or Seven-Year Amortization

1. Acquisition or Completion Date

2. Certified Treatment Facility

3. New Identifiable Facility

D. Calculating the Amortization Deduction

1. Amount of Deduction

2. Amortizable Basis

a. Facility Treated as Two Separate Facilities

b. Profit-Making Abatement

c. Useful Life Exceeding 15 Years

E. Special Considerations

1. Depreciation After Terminating § 169 Election

2. Recapture Under § § 1245 and 1250

3. Alternative Minimum Tax

F. Certification Procedure


WORKING PAPERS

Working Papers

Table of Worksheets

Other Resources

Worksheet 1 Sample Statement of Election Under Section 169

Worksheet 2 Treasury Regulations - Section 1.169-1 through Section 1.169-4

Worksheet 3 EPA Regulations on Certification of Facilities for Tax Purposes [40 CFR 20]

Worksheet 4 Conference Report to Accompany H.R. 3448, H.R. Rep. No. 737, 104th Cong., 2d Sess. 295–300 (1996) [Income Forecast Method of Depreciation]

Worksheet 4A Conference Report to Accompany P.L. 108-357, Conf. Rep. No. 755, 108th Cong., 2d Sess. 373-374 (2004) [Income Forecast Method of Depreciation]

Worksheet 5 EPA Forms 3300–1, 3300–2, 3300–3 (Certification Forms)

Worksheet 6 Computation of Depreciation Allowances

Worksheet 7 Preamble to Final Regulations on Changes in Accounting Methods, T.D. 9105, 69 Fed. Reg. 5 (1/2/04)

Bibliography

OFFICIAL

Statutes:

Legislative History:

Regulations:

Treasury Rulings:

Cases:

UNOFFICIAL

Books and Treatises

Periodicals:

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