Depreciable cost is the amount of an asset's cost that will be depreciated. Depreciable cost equals acquisition cost less salvage value. In order to determine depreciable cost, then, the contractor must first determine the estimated residual value for each of its assets or groups of assets.
The residual value need not be deducted from the capitalized cost in determining depreciable cost if:
- For tangible, personal property the estimated residual value does not exceed 10 percent of capitalized cost, or
- The contractor uses either the declining-balance method or the class life asset range system.
Estimating allocation of depreciable cost basis
With cost data obtained and allocated between land and depreciable property, the estimated tax benefit for a study using the results of cost segregation studies previously conducted for similar properties can be calculated by estimating a reasonable allocation of depreciable cost basis to personal property, land improvements, and other asset classes. These averages are based on the actual results of previous studies conducted on various properties. Major commercial and residential property categories:
- auto dealerships
- manufacturing facilities
- office building
- shopping centers and malls
- warehouse properties
- flex buildings
A cost segregation study that uses the average asset class allocations to develop an estimate of the tax benefit shows results that are averages. Accordingly, the tax benefits of a cost segregation study for a given property might be either higher or lower than the average, depending on certain characteristics of each property category.
Factors in computing depreciation
Four factors affect the computation of depreciation:
- Cost. Cost is the net purchase price of an asset plus all reasonable and necessary expenditures to get it in place and ready for use.
- Residual value. Residual value is the portion of an asset's acquisition cost that a company expects to recover when it disposes of the asset.
- Depreciable cost. Depreciable cost must be allocated over the useful life of the asset.
- Estimated useful life. Estimated useful life is the total number of service units expected from a long-term asset. Service units may be measured in terms of the years an asset is expected to be used, the units it is expected to produce, the miles it is expected to be driven, or similar measures.
- J.K. Shim 2013, p.211
- K. Masoom 2013, p.121
- J.A. Heintz, R.W. Parry 2016, p.182
- P.G. DiNardo, S.C. Baldwin 2010, p.262
- B.E. Needles, M. Powers 2010, p.484
- DiNardo P.G., Baldwin S.C., (2010), Practical Guide to Cost Segregation, CCH, Chicago.
- Heintz J.A., Parry R.W., (2016), Accounting, Cengage Learning, Mexico.
- Masoom K., (2013), The Entrepreneur’s Dictionary of Business and Financial, Partridge Publishing, Singapore.
- Needles B.E., Powers M., (2010), Principles of Accounting, Cengage Learning, New Delhi.
- Shim J.K., (2013), Dictionary of Accounting Terms, Simon and Schuster, New York.
Author: Natalia Hajduk