Question

How does an business determine the life-span of an asset? Are there standards out there for how long accountants should depreciate an asset? What could be some consequences for aggressively depreciating an asset?

Answer 1

The useful life of an asset is an estimation of the length of time the asset can reasonably be used to generate income and be of benefit to the company. The useful life of identical assets varies by user and they depend upon the asset's age, the frequency of use, the condition of business environment and the aasset's repair policy.

The Internal Revenue Service(IRS) utilizes the useful life of an asset to estimate the period of time over which depreciation of asset may occur. The IRS has developed a list of standard useful life spans for nearly every asset that company may acquire for use in its business. For example, Computers, Cars,buses,etc - 5 years

Non residential real estate - 39 years

Consequences of Aggressive depreciation:-

- It lets you take a higher depreciation deduction immediately and hence reduce its current tax.

- The higher upfront depreciation deduction comes at the expense of lower deduction in fhe future. For a growing business, this can be a problem.

- They have a greater risk of recaptured depreciation. If you sell the asset for more than its current accounting value, your profit will be considered recaptured depreciation and it will be taxed.

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