Masonry Magazine June 1965 Page. 21
greatest source of contention with the Treasury Department.
Let's consider the four factors in greater detail. Generally speaking, basis refers to cost, particularly in the case of outright purchase for cash or equivalent. However, even in such instance, consideration should be given to expensing the cost of certain accessories which are certain to be worn out within a year, may be easily separated from the machine and do not form part of its mechanism. You might check the Tomkins case concerning the expensing of tires on new vehicles. Property acquired by means other than outright purchase, transactions involving trades, etc. have other considerations for determining basis.
There are essentially two methods for determining useful life: 1) the taxpayer's own experience, and 2) Treasury's Guidelines. Useful life is the reasonably expected useful life to a particular taxpayer not necessarily the "inherent" useful life in the asset. The useful life of a particular piece of equipment may vary considerably from one taxpayer to another, depending on several factors, such as use, local conditions (climate), natural wear and tear, obsolescence, repair and replacement policy and condition when acquired (new or used). Section 167 of the Code specifically provides that the deduction for depreciation shall include a reasonable allowance for obsolescence. This allowance is usually made by reducing the otherwise useful life of the asset to reflect its future obsolescence.
A Treasury official has said, "Revenue agents are instructed to consider carefully evidence presented by taxpayers with respect to obsolescence on a forward-looking basis, rather than in the static light of the past". However, you must clearly be able to show that the whole or part of the property in question is being affected by economic conditions that will result in its being abandoned at a future date prior to the end of its useful life.
The historical record, I believe, bears out the increasing importance of obsolescence. According to Bytwork's study, in 1935, 73% of the construction industry's equipment was over 10 years old. He makes the point that the trend is toward equipment use for shorter periods. Equipment of new design makes labor-saving methods possible.
This point, I believe, is also borne out by observing what has happened, for example, to the price of dirt. Despite higher costs of equipment and very substantial increases in labor rates, dirt prices have not risen. In fact, one wonders sometimes where the bottom is!
I don't have to tell you that, unless a contractor is constantly up-dating his equipment spread, he just isn't going to stay in the game. I would hope that those who revise the tax code, as well as those who enforce it, will give increased consideration to this point. And I hope our contractor friends will bear this point in mind the next time they confront us with a trade-in.
Now just a few words on salvage value, which affects depreciation in two ways: 1) It reduces the annual
MASONRY.
June, 1965
depreciation deduction to which the taxpayer is entitled, and 2) Property cannot be depreciated below its salvage value.
There are many recognized methods of computing depreciation. Some are generally applicable others are limited to particular property or situations.
The straight-line method it perhaps the most familiar and easiest to understand. It gives a proportionately equal deduction over the life of the asset and is available for all property.
The new law makes it possible to concentrate greater depreciation deductions in the years when the property is subject to the greatest loss in monetary resale value. Because production capacity is greater in the earlier years, the new law also permits a closer matching of assets expense to asset earnings.
One of the accelerated methods is the 200% declining balance method. This method produces a substantially higher deduction in the early years of useful life. It is available, in effect, for new tangible property with a life of 3 years or more.
A method similar to the 200% declining balance method is the 150% declining balance method. This method produces a somewhat smaller early year deduction, but is generally available for all tangible property, new or used.
A procedure by which the depreciation deduction can be somewhat increased in the latter years under the declining balance methods is to switch the method to straight-line. The reason given by the Congressional Committee for enacting this provision is that the declining balance method has a tendency to fail to depreciate property to realistic salvage values within the useful life of the asset. The extent of this failure is influenced by the life being used.
The last approved method which I'll mention is the sum-of-the years-digits method. This method produces
COMPARISON OF DEPRECIATION METHODS
CUMULATIVE DEPRECIATION