Engineering Economic Analysis

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348 DEPRECIATION

depreciation.Thus it is muchless economicallyattractive.Underlaw,ADSmustbe used

for (1) any tangible property used primarily outside the United States, (2) any property that

is tax exempt or financed by tax-exempt bonds, and (3) farming property placed in ser-

vice when uniform capitalization rules are not applied. The ADS may also beelected

for property that can be depreciated using the GDS system. However, once ADS has

been elected for an asset, it is not possible to switch back to the GDS system. Because

the ADS makes the depreciation deductions less valuable, unless ADS is specifically

mentioned, subsequent discussion assumes the GDS system when reference is made to

MACRS.

Once a property has been determined to be eligible for depreciation, the next step is to

calculate its depreciation deductions over its life. The following information is required to

calculate these deductions:

·The cost basis of the property.

·Theproperty classandrecoveryperiodof the asset.

·The asset's placed-in-service date.

Cost Basis and Placed-in-Service Date

The cost basis,B,is the cost to obtain and place the asset in service fit for use. However,

for real property the basis may also include certain fees and charges that the buyer pays as

part of the purchase. Examples of such fees include legal and recording fees, abstract fees,

survey charges, transfer taxes, title insurance, and amounts that the seller owes that you pay

(back taxes, interest, sales commissions, etc.).

Depreciation for a business asset beginswhenthe asset isplaced in servicefor a business

purpose. If an asset is purchased and used in a personal context, depreciation may not be

taken. If that asset is later used in business for income-producingactivity,depreciation may

begin with the change in usage.

Property Class and Recovery,Period

Each depreciated asset is placed in aMACRS property class,which defines the recovery

period and the depreciation percentage for each year. Historically the IRS.assigned each

type of depreciable asset aclass lifeor anasset depreciation range.With MACRS, asset

class lives have been pooled together in theproperty classes.Table 11-1 lists the class lives

and GDS and ADS property classes for severalexample depreciable assets. Table 11-2lists

the MACRS GDS property classes.

The MACRS GDS property classes are described in more detail in Table 11-2. The

proper MACRS property class.can be found several different ways. In the list below, the

first approach that works should be used.

1. Property class given in problem.


2. Asset is named in Table 11-2.


3. IRS tables or Table 11-1.


4. Class life.


5. Seven-yearproperty for "all other property not assigned to another class."