[Code of Federal Regulations] [Title 26, Volume 2] [Revised as of April 1, 2004] From the U.S. Government Printing Office via GPO Access [CITE: 26CFR1.167(b)-2] [Page 992-994] TITLE 26--INTERNAL REVENUE CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY (CONTINUED) PART 1_INCOME TAXES--Table of Contents Sec. 1.167(b)-2 Declining balance method. (a) Application of method. Under the declining balance method a uniform rate is applied each year to the unrecovered cost or other basis of the property. The unrecovered cost or other basis is the basis provided by section [[Page 993]] 167(g), adjusted for depreciation previously allowed or allowable, and for all other adjustments provided by section 1016 and other applicable provisions of law. The declining balance rate may be determined without resort to formula. Such rate determined under section 167(b)(2) shall not exceed twice the appropriate straight line rate computed without adjustment for salvage. While salvage is not taken into account in determining the annual allowances under this method, in no event shall an asset (or an account) be depreciated below a reasonable salvage value. However, see section 167(f) and Sec. 1.167(f)-1 for rules which permit a reduction in the amount of salvage value to be taken into account for certain personal property acquired after October 16, 1962. Also, see section 167(c) and Sec. 1.167(c)-1 for restrictions on the use of the declining balance method. (b) Illustrations. The declining balance method is illustrated by the following examples: Example (1). A new asset having an estimated useful life of 20 years was purchased on January 1, 1954, for $1,000. The normal straight line rate (without adjustment for salvage) is 5 percent, and the declining balance rate at twice the normal straight line rate is 10 percent. The annual depreciation allowances for 1954, 1955, and 1956 are as follows: ------------------------------------------------------------------------ Declining balance Depreciation Year Basis rate allowance (percent) ------------------------------------------------------------------------ 1954.............................. $1,000 10 $100 1955.............................. 900 10 90 1956.............................. 810 10 81 ------------------------------------------------------------------------ Example (2). A taxpayer filing his returns on a calendar year basis maintains a group account to which a 5 year life and a 40 percent declining balance rate are applicable. Original investment, additions, retirements, and salvage recoveries are the same as those set forth in example (3) of paragraph (b) of Sec. 1.167(b)-1. Although salvage value is not taken into consideration in computing a declining balance rate, it must be recognized and accounted for when assets are retired. Depreciable Asset Account and Depreciation Computation Using Average Asset and Reserve Balances -------------------------------------------------------------------------------------------------------------------------------------------------------- Average Asset Current Current Asset reserve Net Rate Allowable Year balance additions retirements balance Average before depreciable (pct.) depreciation Jan. 1 Dec. 31 depreciation balance -------------------------------------------------------------------------------------------------------------------------------------------------------- 1954........................................... ........ $12,000 ........... $12,000 $6,000 ............ $6,000 40 $2,400 1955........................................... $12,000 ......... ........... 12,000 12,000 $2,400 9,600 40 3,840 1956........................................... 12,000 ......... ........... 12,000 12,000 6,240 5,760 40 2,304 1957........................................... 12,000 ......... $2,000 10,000 11,000 7,644 3,356 40 1,342 1958........................................... 10,000 ......... 2,000 8,000 9,000 7,186 1,814 40 726 1959........................................... 8,000 10,000 4,000 14,000 11,000 5,212 5,788 40 2,315 1960........................................... 14,000 ......... 2,000 12,000 13,000 4,727 8,273 40 3,309 1961........................................... 12,000 ......... 2,000 10,000 11,000 6,036 4,964 40 1,986 -------------------------------------------------------------------------------------------------------------------------------------------------------- Depreciation Reserve -------------------------------------------------------------------------------------------------------------------------------------------------------- Average Reserve Current Salvage Reserve Dec. reserve Allowable Reserve Dec. Year Jan. 1 retirements realized 31, before before depreciation 31, after depreciation depreciation depreciation -------------------------------------------------------------------------------------------------------------------------------------------------------- 1954........................................................... ........ ........... ........ ............ ............ $2,400 $2,400 1955........................................................... $2,400 ........... ........ $2,400 $2,400 3,840 6,240 1956........................................................... 6,240 ........... ........ 6,240 6,240 2,304 8,544 1957........................................................... 8,544 $2,000 $200 6,744 7,644 1,342 8,086 1958........................................................... 8,086 2,000 200 6,286 7,186 726 7,012 1959........................................................... 7,012 4,000 400 3,412 5,212 2,315 5,727 1960........................................................... 5,727 2,000 ........ 3,727 4,727 3,309 7,036 1961........................................................... 7,036 2,000 ........ 5,036 6,036 1,986 7,022 -------------------------------------------------------------------------------------------------------------------------------------------------------- Where separate depreciation accounts are maintained by year of acquisition and there is an unrecovered balance at the time of the last retirement, such unrecovered balance may be deducted as part of the depreciation allowance for the year of such retirement. Thus, if the taxpayer had kept separate depreciation accounts by year of acquisition [[Page 994]] and all the retirements shown in the example above were from 1954 acquisitions, depreciation would be computed on the 1954 and 1959 acquisitions as follows: 1954 Acquisitions -------------------------------------------------------------------------------------------------------------------------------------------------------- Asset Asset Avg. reserve Net Year balance Acquisitions Current balance Average before depreciable Rate Allowable Jan. 1 retirements Dec. 31 balance depreciation balance (percent) depreciation -------------------------------------------------------------------------------------------------------------------------------------------------------- 1954....................................... ........ $12,000 ........... $12,000 $6,000 ............ $6,000 40 $2,400 1955....................................... $12,000 ............ ........... 12,000 12,000 $2,400 9,600 40 3,840 1956....................................... 12,000 ............ ........... 12,000 12,000 6,240 5,760 40 2,304 1957....................................... 12,000 ............ $2,000 10,000 11,000 7,644 3,356 40 1,342 1958....................................... 10,000 ............ 2,000 8,000 9,000 7,186 1,814 40 726 1959....................................... 8,000 ............ 4,000 4,000 6,000 5,212 788 40 315 1960....................................... 4,000 ............ 2,000 2,000 3,000 2,727 273 40 109 1961....................................... 2,000 ............ 2,000 ........ 1,000 836 164 ......... \1\ 164 -------------------------------------------------------------------------------------------------------------------------------------------------------- \1\ Balance allowable as depreciation in the year of retirement of the last survivor of the 1954 acquisitions. Depreciation Reserve for 1954 Acquisitions -------------------------------------------------------------------------------------------------------------------------------------------------------- Average Reserve Current Salvage Reserve Dec. reserve Allowable Reserve Dec. Year Jan. 1 retirements realized 31, before before depreciation 31, after depreciation depreciation depreciation -------------------------------------------------------------------------------------------------------------------------------------------------------- 1954........................................................... ........ ........... ........ ............ ............ $2,400 $2,400 1955........................................................... $2,400 ........... ........ $2,400 $2,400 3,840 6,240 1956........................................................... 6,240 ........... ........ 6,240 6,240 2,304 8,544 1957........................................................... 8,544 $2,000 $200 6,744 7,644 1,342 8,086 1958........................................................... 8,086 2,000 200 6,286 7,186 726 7,012 1959........................................................... 7,012 4,000 400 3,412 5,212 315 3,727 1960........................................................... 3,727 2,000 ........ 1,727 2,727 109 1,836 1961........................................................... 1,836 2,000 ........ (164) 836 164 ............ -------------------------------------------------------------------------------------------------------------------------------------------------------- 1959 Acquisitions -------------------------------------------------------------------------------------------------------------------------------------------------------- Asset Asset Reserve Dec. Net Reserve Dec. Year balance Acquisition balance Avg. 31, before depreciable Rate Allowable 31, after Jan. 1 Dec. 31 balance depreciation balance percent depreciation depreciation -------------------------------------------------------------------------------------------------------------------------------------------------------- 1959........................................ ........ $10,000 $10,000 $5,000 None $5,000 40 $2,000 $2,000 1960........................................ $10,000 ........... 10,000 10,000 $2,000 8,000 40 3,200 5,200 1961........................................ 10,000 ........... 10,000 10,000 5,200 4,800 40 1,920 7,120 -------------------------------------------------------------------------------------------------------------------------------------------------------- In the above example, the allowable depreciation on the 1954 acquisitions totals $11,200. This amount when increased by salvage realized in the amount of $800, equals the entire cost or other basis of the 1954 acquisitions ($12,000). (c) Change in estimated useful life. In the declining balance method when a change is justified in the useful life estimated for an account, subsequent computations shall be made as though the revised useful life had been originally estimated. For example, assume that an account has an estimated useful life of ten years and that a declining balance rate of 20 percent is applicable. If, at the end of the sixth year, it is determined that the remaining useful life of the account is six years, computations shall be made as though the estimated useful life was originally determined as twelve years. Accordingly, the applicable depreciation rate will be 16\2/3\ percent. This rate is thereafter applied to the unrecovered cost or other basis. [T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6712, 29 FR 3653, Mar. 24, 1964]