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(a) - * Depreciation in General

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(1) Reasonable Allowance. Section
					 24349 provides that a reasonable
					 allowance for the exhaustion, wear and tear, and obsolescence of property used
					 in the trade or business shall be allowed as a depreciation deduction. The
					 allowance is that amount which should be set aside for the income year in
					 accordance with a reasonably consistent plan (not necessarily at a uniform
					 rate) so that the aggregate of the amounts set aside, plus the salvage value,
					 will, at the end of the estimated useful life of the depreciable property,
					 equal the cost or other basis of the property. An asset shall not be
					 depreciated below a reasonable salvage value. See paragraph (3) of this
					 regulation for definition of salvage. The allowance shall not reflect amounts
					 representing a mere reduction in market value.
(2) Useful Life. For the purpose of Section
					 24349 the estimated useful life of
					 an asset is not necessarily the useful life inherent in the asset but is the
					 period over which the asset may reasonably be expected to be useful to the
					 taxpayer in its trade or business. This period shall be determined by reference
					 to its experience with similar property taking into account present conditions
					 and probable future development. Some of the factors to be considered in
					 determining this period are (a) wear and tear and decay or decline from natural
					 causes, (b) the normal progress of the art, economic changes, inventions, and
					 current developments within the industry and the taxpayer's trade or business,
					 (c) the climatic and other local conditions peculiar to the taxpayer's trade or
					 business, and (d) the taxpayer's policy as to repairs, renewals, and
					 replacements. Salvage value is not a factor for the purpose of determining
					 useful life. If the taxpayer's experience is inadequate, the general experience
					 in the industry, may be used until such time as the taxpayer's own experience
					 forms an adequate basis for making the determination. The estimated remaining
					 useful life may be subject to modification by reason of conditions known to
					 exist at the end of the income year and shall be redetermined when necessary.
					 However, estimated remaining useful life shall be redetermined only when the
					 change in the useful life is significant and there is a clear and convincing
					 basis for the redetermination.
(3)
					 Salvage. Salvage value is the amount (determined at the time of acquisition)
					 which is estimated will be realizable upon sale or other disposition of an
					 asset when it is no longer useful in the taxpayer's trade or business and is to
					 be retired from service by the taxpayer. Salvage value shall not be changed at
					 any time after the determination made at the time of acquisition merely because
					 of changes in price levels. However, if there is a redetermination of useful
					 life under the rules of paragraph (2) of this regulation, salvage value may be
					 redetermined based upon facts known at the time of such redetermination of
					 useful life. Salvage, when reduced by the cost of removal, is referred to as
					 net salvage. The time at which an asset is retired from service may vary
					 according to the policy of the taxpayer. If the taxpayer's policy is to dispose
					 of assets which are still in good operating condition, the salvage value may
					 represent a relatively large proportion of the original basis of the asset.
					 However, if the taxpayer customarily uses an asset until its inherent useful
					 life has been substantially exhausted, salvage value may represent no more than
					 junk value. Salvage value must be taken into account in determining the
					 depreciation deduction either by a reduction of the amount subject to
					 depreciation or by a reduction in the rate of depreciation, but in no event
					 shall an asset (or an account) be depreciated below a reasonable salvage value.
					 The taxpayer may use either salvage or net salvage in determining depreciation
					 allowances but such practice must be consistently followed and the treatment of
					 the costs of removal must be consistent with the practice adopted. When an
					 asset is retired or disposed of, appropriate adjustments shall be made in the
					 asset and depreciation reserve accounts. For example, the amount of the salvage
					 adjusted for the costs of removal may be credited to the depreciation reserve.
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* Except for the deletion of provisions in the federal
						regulations regarding new methods of computing depreciation, this regulation is
						substantially the same as Section
						26 CFR
						1.167(a)-1.