#### § 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 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 § 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 § 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:

| Year | Basis | Declining balance rate (percent) | Depreciation allowance |
| --- | --- | --- | --- |
| 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 § 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.

| Year | Asset balance Jan. 1 | Current additions | Current retirements | Asset balance Dec. 31 | Average | Average reserve before depreciation | Net depreciable balance | Rate (pct.) | Allowable 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 | 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 |

Depreciable Asset Account and Depreciation Computation Using Average Asset and Reserve Balances

| Year | Reserve Jan. 1 | Current retirements | Salvage realized | Reserve Dec. 31, before depreciation | Average reserve before depreciation | Allowable depreciation | Reserve Dec. 31, after 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 |

Depreciation Reserve

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 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:

| Year | Asset balance Jan. 1 | Acquisitions | Current retirements | Asset balance Dec. 31 | Average balance | Avg. reserve before depreciation | Net depreciable balance | Rate (percent) | Allowable 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. |

1954 Acquisitions

| Year | Reserve Jan. 1 | Current retirements | Salvage realized | Reserve Dec. 31, before depreciation | Average reserve before depreciation | Allowable depreciation | Reserve Dec. 31, after 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 | |

Depreciation Reserve for 1954 Acquisitions

| Year | Asset balance Jan. 1 | Acquisition | Asset balance Dec. 31 | Avg. balance | Reserve Dec. 31, before depreciation | Net depreciable balance | Rate percent | Allowable depreciation | Reserve Dec. 31, after 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 |

1959 Acquisitions

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 162⁄3 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]