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IRS.gov Website
Publication 534
taxmap/pubs/p534-005.htm#en_us_publink100043649

Chapter 2
Other Methods of Depreciation (p7)



taxmap/pubs/p534-005.htm#TXMP452699ea

Useful items

You may want to see:


Publication
 544  Sales and Other Dispositions of Assets
 551  Basis of Assets
 583  Starting a Business and Keeping Records
 946  How To Depreciate Property
Form (and Instructions)
 3115 : Application for Change in Accounting Method
 4562 : Depreciation and Amortization
 Schedule C (Form 1040) : Profit or Loss From Business
If your property is being depreciated under ACRS, you must continue to use rules for depreciation that applied when you placed the property in service. If your property qualified for MACRS, you must depreciate it under MACRS. See Pub. 946.
However, you cannot use MACRS for certain property because of special rules that exclude it from MACRS. Also, you can elect to exclude certain property from being depreciated under MACRS. Property that you cannot depreciate using MACRS includes:
  1. Intangible property,
  2. Property you can elect to exclude from MACRS that you properly depreciate under a method that is not based on a term of years,
  3. Certain public utility property,
  4. Any motion picture film or video tape,
  5. Any sound recording, and
  6. Certain real and personal property placed in service before 1987.
taxmap/pubs/p534-005.htm#en_us_publink100043650

Intangible property.(p7)

rule
You cannot depreciate intangible property under ACRS or MACRS. You depreciate intangible property using any other reasonable method, usually, the straight line method.
Note. The cost of certain intangible property that you acquire after August 10, 1993, must be amortized over a 15-year period. For more information, see chapter 8 of Pub. 535.
taxmap/pubs/p534-005.htm#en_us_publink100043652

Public utility property. (p7)

rule
The law excludes from MACRS any public utility property for which the taxpayer does not use a normalization method of accounting. This type of property is subject to depreciation under a special rule.
taxmap/pubs/p534-005.htm#en_us_publink100043653

Videocassettes. (p7)

rule
If you are in the videocassette rental business, you can depreciate those videocassettes purchased for rental. You can depreciate the cost less salvage value of those videocassettes that have a useful life over one year using either: The straight line method, salvage value, and useful life are discussed later under Methods To Use. You can deduct in the year of purchase as a business expense the cost of any cassette that has a useful life of one year or less.
taxmap/pubs/p534-005.htm#en_us_publink100043654

How To Figure the Deduction(p7)

rule
Two other reasonable methods can be used to figure your deduction for property not covered under ACRS or MACRS. These methods are straight line and declining balance.
To figure depreciation using these methods, you must generally determine three things about the property you intend to depreciate. They are:
  1. The basis,
  2. The useful life, and
  3. The estimated salvage value at the end of its useful life.
The amount of the deduction in any year also depends on which method of depreciation you choose.
taxmap/pubs/p534-005.htm#en_us_publink100043655

Basis(p7)

rule
To deduct the proper amount of depreciation each year, first determine your basis in the property you intend to depreciate. The basis used for figuring depreciation is the same as the basis that would be used for figuring the gain on a sale. Your original basis is usually the purchase price. However, if you acquire property in some other way, such as inheriting it, getting it as a gift, or building it yourself, you have to figure your original basis in a different way.
taxmap/pubs/p534-005.htm#en_us_publink100043656

Adjusted basis.(p7)

rule
Events will often change the basis of property. When this occurs, the changed basis is called the adjusted basis. Some events, such as improvements you make, increase basis. Events such as deducting casualty losses and depreciation decrease basis. If basis is adjusted, the depreciation deduction may also have to be changed, depending on the reason for the adjustment and the method of depreciation you are using.
Pub. 551 explains how to figure basis for property acquired in different ways. It also discusses what items increase and decrease basis, how to figure adjusted basis, and how to allocate cost if you buy several pieces of property at one time.
taxmap/pubs/p534-005.htm#en_us_publink100043657

Useful Life(p7)

rule
The useful life of a piece of property is an estimate of how long you can expect to use it in your trade or business, or to produce income. It is the length of time over which you will make yearly depreciation deductions of your basis in the property. It is how long it will continue to be useful to you, not how long the property will last.
Many things affect the useful life of property, such as:
  1. Frequency of use,
  2. Age when acquired,
  3. Your repair policy, and
  4. Environmental conditions.
The useful life can also be affected by technological improvements, progress in the arts, reasonably foreseeable economic changes, shifting of business centers, prohibitory laws, and other causes. Consider all these factors before you arrive at a useful life for your property.
The useful life of the same type of property varies from user to user. When you determine the useful life of your property, keep in mind your own experience with similar property. You can use the general experience of the industry you are in until you are able to determine a useful life of your property from your own experience.
taxmap/pubs/p534-005.htm#en_us_publink100043658

Change in useful life.(p7)

rule
You base your estimate of useful life on certain facts. If these facts change significantly, you can adjust your estimate of the remaining useful life. However, you redetermine the estimated useful life only when the change is substantial and there is a clear reason for making the change.
taxmap/pubs/p534-005.htm#en_us_publink100043659

Salvage Value(p7)

rule
It is important for you to accurately determine the correct salvage value of the property you want to depreciate. You generally cannot depreciate property below a reasonable salvage value.
taxmap/pubs/p534-005.htm#en_us_publink100043660

Determining salvage value.(p7)

rule
Salvage value is the estimated value of property at the end of its useful life. It is what you expect to get for the property if you sell it after you can no longer use it productively. You must estimate the salvage value of a piece of property when you first acquire it.
Salvage value is affected both by how you use the property and how long you use it. If it is your policy to dispose of property that is still in good operating condition, the salvage value can be relatively large. However, if your policy is to use property until it is no longer usable, its salvage value can be its junk value.
taxmap/pubs/p534-005.htm#en_us_publink100043661

Changing salvage value.(p8)

rule
Once you determine the salvage value for property, you should not change it merely because prices have changed. However, if you redetermine the useful life of property, as discussed earlier under Change in useful life, you can also redetermine the salvage value. When you redetermine the salvage value, take into account the facts that exist at the time.
taxmap/pubs/p534-005.htm#en_us_publink100043662

Net salvage.(p8)

rule
Net salvage is the salvage value of property minus what it costs to remove it when you dispose of it. You can choose either salvage value or net salvage when you figure depreciation. You must consistently use the one you choose and the treatment of the costs of removal must be consistent with the practice adopted. However, if the cost to remove the property is more than the estimated salvage value, then net salvage is zero. Your salvage value can never be less than zero.
taxmap/pubs/p534-005.htm#en_us_publink100043663

10% rule.(p8)

rule
If you acquire personal property that has a useful life of 3 years or more, you can use an amount for salvage value that is less than your actual estimate. You can subtract from your estimate of salvage value an amount equal to 10% of your basis in the property. If salvage value is less than 10% of basis, you can ignore salvage value when you figure depreciation.