(a) In general. 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.
(b) Illustrations. The straight line method is illustrated by the following examples:
Under the straight line method items may be depreciated separately:
| Year and item | Cost or other basis less salaries | Useful life (years) | Depreciation allowable | ||
|---|---|---|---|---|---|
| 1954 | 1955 | 1956 | |||
| 1954: | |||||
| Asset A | $1,600 | 4 | 1 $200 | $400 | $400 |
| Asset B | 12,000 | 40 | 1 150 | 300 | 300 |
1 In this example it is assumed that the assets were placed in service on July 1, 1954.
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 |
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
1954—Initial investment of $12,000.
1957—Retirement $2,000, salvage realized $200.
1958—Retirement $2,000, salvage realized $200.
1959—Retirement $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 |
The preliminary Code is a preliminary release of the Internal Revenue Code of 1986 (the "Code") by the Office of the Law Revision Counsel and is subject to further revision before it is released again as a final version. The source of the preliminary Code used in TouchTax is available here: https://uscode.house.gov/download/download.shtml. The Code is a consolidation and codification by subject matter of the general and permanent laws of the U.S. prepared by the Office of the Law Revision Counsel of the U.S. House of Representatives. The Treasury Regulations are a codification of the general and permanent rules published in the Federal Register by the departments and agencies of the federal government. The version of the Treasury Regulations available within TouchTax is part of the Electronic Code of Federal Regulations which is not an official legal edition of the Code of Federal Regulations but is an editorial compilation of CFR material and Federal Register amendments produced by the National Archives and Records Administration's Office of the Federal Register (OFR) and the Government Publishing Office. The source of the CFR used in TouchTax is available here: https://www.govinfo.gov/bulkdata/ECFR/title-26. Those using TouchTax for legal research should verify their results against the printed versions of the Code and Treasury Regulations. TouchTax is copyright 2024 by Com-Lab (Mobile). Learn more at http://touchtax.edrich.de.