California Code of Regulations › Title 18 - Public Revenues › Division 3 - Franchise Tax Board › Chapter 3.5 - Bank and Corporation Tax › Subchapter 7 - Net Income › Article 1 - Deductions › Section 24349(k) - Method of Computing Depreciation

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(1) In General. Regardless of the method used
					 in computing depreciation, deductions for depreciation shall not exceed such
					 amounts as may be necessary to recover the unrecovered cost or other basis less
					 salvage during the remaining useful life of the property. The reasonableness of
					 any claim for depreciation shall be determined upon the basis of conditions
					 known to exist at the end of the period for which the return is made. It is the
					 responsibility of the taxpayer to establish the reasonableness of the deduction
					 for depreciation claimed. Generally, depreciation deductions so claimed will be
					 changed only where there is a clear and convincing basis for a
					 change.
(2) Approved Methods. Any
					 method of depreciation which was acceptable prior to the 1955 revision of the
					 law or under the Internal Revenue Code of 1939 is an approved method. The most
					 common of these methods is the straight line, whereby the annual allowance for
					 depreciation is determined by dividing the cost of the property, less its
					 estimated salvage value, by the number of years of its estimated life. While
					 other methods may be used, the amount set aside for depreciation should be in
					 accordance with a reasonably consistent plan (not necessarily at a uniform
					 rate), whereby the aggregate of the amounts so set aside, plus the salvage
					 value, will, at the end of the useful life of the property in the business,
					 equal the cost or other basis of the property determined in accordance with
					 Articles 1 and 2 of Chapter 15.
Since counterparts of Section
						167(b)(2), (3), (4), (c), (d), and
						(e) of the Internal Revenue Code of 1954,
						were not enacted by the Legislature and made a part of this law until 1959, the
						"200 percent declining balance" and "sum-of-the-digits" methods of computing
						depreciation were not approved methods for determining income for state tax
						purposes until income years ending after December 31, 1958. However, if the
						declining balance method was in use prior to the 1955 revision of the law such
						method may be continued, but the rate must be limited to
150
						percent
of the applicable straight line method. In the case of new
						assets, i.e., assets acquired after December 31, 1954, the declining balance
						method may be used if the rate is limited to 150 percent of the applicable
						straight line method.
No deduction may be taken on account of depreciation
						actually sustained before January 1, 1928, under Chapter 2, or January 1, 1937,
						under Chapter 3.
(A) Straight line
					 method.
(i)
Application of
					 method
. Under the straight line method the cost or other basis of the
					 property less its estimated salvage value is deductible in equal annual amounts
					 over the period of the estimated useful life of the property. The allowance for
					 depreciation for the taxable year is determined by dividing the adjusted basis
					 of the property at the beginning of the taxable year, less salvage value, by
					 the remaining useful life of the property at such time. For convenience, the
					 allowance so determined may be reduced to a percentage or fraction. The
					 straight line method may be used in determining a reasonable allowance for
					 depreciation for any property which is subject to depreciation under section
					 167 and it shall be used in all
					 cases where the taxpayer has not adopted a different acceptable method with
					 respect to such property.
(ii)
					 Illustrations. The straight line method is illustrated by the following
					 examples:
EXAMPLE (1).
Under the straight line method items may be depreciated
						separately:
Year
Item
Cost
								or other basis less salvage
Useful
								life
Depreciation
								Allowable
Years
1954
1955
1956
1954
Asset
								A
$1,600
4
$2001
$400
$400
Asset
								B
12,000
40
1501
300
300
1 In this example it is assumed that the assets were
						placed in service on July 1, 1954.
EXAMPLE (2).
In group, classified, or composite accounting, a number
						of assets with the same or different useful lives may be combined into one
						account, and a single rate of depreciation, i.e., the group, classified, or
						composite rate used for the entire account. In the case of group accounts,
						i.e., accounts containing assets which are similar in kind and which have
						approximately the same estimated useful lives, the group rate is determined
						from the average of the useful lives of the assets. In the case of classified
						or composite accounts, the classified or composite rate is generally computed
						by determining the amount of one year's depreciation for each item or each
						group of similar items, and by dividing the total depreciation thus obtained by
						the total cost or other basis of the assets. The average rate so obtained is to
						be used as long as subsequent additions, retirements, or replacements do not
						substantially alter the relative proportions of different types of assets in
						the account. An example of the computation of a classified or composite rate
						follows:
Cost or other
								basis
Estimated useful life
								Years
Annual
								depreciation
$10,000
5
$2,000
10,000
15
667
20,000
2,667
Average rate is 13.33 percent ($2,667 / $20,000)
						unadjusted for salvage. Assuming the estimated salvage value is 10 percent of
						the cost or other basis, the rate adjusted for salvage will be 13.33 percent
						minus 10 percent of 13.33 percent (13.33% - 1.33%), or 12 percent.
EXAMPLE (3).
The use of the straight line method for group,
						classified, or composite accounts is illustrated by the following example: A
						taxpayer filing his returns on a calendar year basis maintains an asset account
						for which a group rate of 20 percent has been determined, before adjustment for
						salvage. Estimated salvage is determined to be 6 
						2/3
						percent, resulting in an adjusted rate of 18.67 percent. During the years
						illustrated, the initial investment, additions, retirements, and salvage
						recoveries, which were determined not to change the composition of the group
						sufficiently to require a change in rate, were assumed to have been made as
						follows:
1954--Initial investment of $12,000
1957--Retirement $2,000, salvage realized $200
1958--Retirement $2,000, salvage realized $200
1959--Retirements $4,000, salvage realized $400
1959--Additions $10,000
1960--Retirement $2,000, no salvage realized
1961--Retirement $2,000, no salvage realized
Depreciable Asset Account and Depreciation
						Computation on Average Balances
Year
Asset
								balance Jan. 1
Current
								additions
Current
								retirements
Asset balance Dec.
								31
Average
								balance
Rate
								(percent)
Allowable
								depreciation
1954
___
$12,000
___
$12,000
$6,000
18.67
$1,120
1955
$12,000
___
___
12,000
12,000
18.67
2,240
1956
12,000
___
___
12,000
12,000
18.67
2,240
1957
12,000
___
$2,000
10,000
11,000
18.67
2,054
1958
10,000
___
2,000
8,000
9,000
18.67
1,680
1959
8,000
10,000
4,000
14,000
11,000
18.67
2,054
1960
14,000
___
2,000
12,000
13,000
18.67
2,427
1961
12,000
___
2,000
10,000
11,000
18.67
2,054
Corresponding Depreciation Reserve
						Account
Year
Depreciation
								reserve Jan. 1
Depreciation
								allowable
Current
								retirements
Salvage
								realized
Depreciation reserve Dec.
								31
1954
___
$1,120
___
___
$1,120
1955
$1,120
2,240
___
___
3,360
1956
3,360
2,240
___
___
5,600
1957
5,600
2,054
$2,000
$200
5,854
1958
5,854
1,680
2,000
200
5,734
1959
5,734
2,054
4,000
400
4,188
1960
4,188
2,427
2,000
___
4,615
1961
4,615
2,054
2,000
___
4,669