§ 1.167(f)-1 Reduction of salvage value taken into account for certain personal property.
(a) In general. For taxable years beginning after December 31, 1961, and ending after October 16, 1962, a taxpayer may reduce the amount taken into account as salvage value in computing the allowance for depreciation under section 167(a) with respect to “personal property” as defined in section 167(f)(2) and paragraph (b) of this section. The reduction may be made in an amount which does not exceed 10 percent of the basis of the property for determining depreciation, as of the time as of which salvage value is required to be determined (or when salvage value is redetermined), taking into account all adjustments under section 1016 other than (1) the adjustment under section 1016(a)(2) for depreciation allowed or allowable to the taxpayer, and (2) the adjustment under section 1016(a)(19) for a credit earned by the taxpayer under section 38, to the extent such adjustment is reflected in the basis for depreciation. See paragraph (c) of § 1.167(a)-1 for the definition of salvage value, the time for making the determination, the redetermination of salvage value, and the general rules with respect to the treatment of salvage value. See also section 167(g) and § 1.167(g)-1 for basis for depreciation. A reduction of the amount taken into account as salvage value with respect to any property shall not be binding with respect to other property. In no event shall an asset (or an account) be depreciated below a reasonable salvage value after taking into account the reduction in salvage value permitted by section 167(f) and this section.
(b) Definitions and special rules. The following definitions and special rules apply for purposes of section 167(f) and this section.
(1) Personal property. The term “personal property” shall include only depreciable—
(i) Tangible personal property (as defined in section 48 and the regulations thereunder) and
(ii) Intangible personal property
which has an estimated useful life (determined at
the time of acquisition) of 3
years or
more and which is acquired after October 16, 1962. Such
term shall not include livestock.
The term “livestock” includes horses, cattle, hogs, sheep, goats, and mink and
other furbearing animals, irrespective of
the use to which they are put or
the purpose for which they are held.
The original use of the property need not commence with
the taxpayer so long as he acquired it after October 16, 1962; thus,
the property may be new or used. For purposes of determining
the estimated useful life,
the provisions of paragraph (b) of
§ 1.167(a)-1 shall be applied. For
rules determining when
property is acquired, see subparagraph (2) of this paragraph. For purposes of determining
the types of intangible
personal property which are subject to
the allowance for
depreciation, see
§ 1.167(a)-3.
(2) Acquired. In determining whether property is acquired after October 16, 1962, property shall be deemed to be acquired when reduced to physical possession, or control. Property which has not been used in the taxpayer's trade or business or held for the production of income and which is thereafter converted by the taxpayer to such use shall be deemed to be acquired on the date of such conversion. In addition, property shall be deemed to be acquired if constructed, reconstructed, or erected by the taxpayer. If construction, reconstruction, or erection by the taxpayer began before October 17, 1962, and was completed after October 16, 1962, section 167(f) and this section apply only to that portion of the basis of the property which is properly attributable to such construction, reconstruction, or erection after October 16, 1962. Property is considered as constructed, reconstructed, or erected by the taxpayer if the work is done for him in accordance with his specifications. The portion of the basis of such property attributable to construction, reconstruction, or erection after October 16, 1962, consists of all costs of the property allocable to the period after October 16, 1962, including the cost or other basis of materials entering into such work. It is not necessary that such materials be acquired after October 16, 1962, or that they be new in use. If construction or erection by the taxpayer began after October 16, 1962, the entire cost or other basis of such construction or erection qualifies for the reduction provided for by section 167(f) and this section. In the case of reconstruction of property, section 167(f) and this section do not apply to any part of the adjusted basis of such property on October 16, 1962. For purposes of this section, construction, reconstruction, or erection by the taxpayer begins when physical work is started on such construction, reconstruction, or erection.
(c) Illustrations. The provisions of paragraphs (a) and (b) of this section may be illustrated by the following examples:
Example 1.
Taxpayer A purchases a new asset
for use in his
business on January 1, 1963, for $10,000.
The asset qualifies for
the investment credit under section 38 and for
the additional first-year
depreciation allowance under section 179. A is entitled to an
investment credit of $700 (7% × $10,000) and elects to take an additional first-year
depreciation allowance of $2,000 (20% × $10,000).
The basis for
depreciation (determined in accordance with
the provisions of section 167(g) and
§ 1.167(g)-1) is computed as follows:
| Purchase price |
$10,000
|
| Less: Adjustment required for taxable years beginning before Jan. 1, 1964, under section 1016(a)(19), for the investment credit |
$700
|
|
| Adjustment required under section 1016(a)(2) for the additional first-year depreciation allowance |
2,000
|
|
|
2,700
|
|
| Basis for depreciation for the taxable year 1963 |
7,300 |
However,
the basis of
the property for determining
depreciation as of
the time as of which salvage
value is required to be determined is $10,000,
the purchase price of
the property. A files his
income tax returns on a
calendar year basis and uses
the straight line method of depreciation. A
estimates that he will use
the asset in his
business for 10
years after which it will have a salvage
value of $500, which is less than $1,000 (10% × $10,000,
the basis of
the property for determining
depreciation as of
the time as of which salvage
value is required to be determined). For
the taxable year 1963 A may deduct $730 as
the depreciation allowance. As of January 1, 1964,
the basis of
the asset is increased by $700 in accordance with paragraph (d) of
§ 1.48-7. In computing his total
depreciation allowance on
the asset, A may reduce
the amount taken into
account as salvage value to zero and may
claim depreciation deductions (including
the additional first-year
depreciation allowance) totaling $10,000. See paragraph (d) of
§ 1.48-7 for
the computation of
depreciation for
taxable years beginning after December 31, 1963, where there is an
increase in basis of
property subject to
the investment credit.
Example 2.
Assume
the same
facts as in
example (1) except that A in a subsequent
taxable year redetermines
the estimate of
the useful life of
the asset and at
the same time also redetermines
the estimate of salvage
value. Assume also that at such time
the only
reductions reflected in
the basis are for
depreciation allowed or allowable. Accordingly,
the reduction under section 167(f) and this section will be computed with regard to
the purchase price and not the unrecovered
basis for
depreciation at
the time of
the redetermination.
Example 3.
Assume
the same
facts as in
example (1) except that A
estimates that
the asset will have a salvage
value of $1,200 at
the end of its useful life. In computing his
depreciation for
the asset, A may reduce
the amount to be taken into
account as salvage value to $200 ($1,200−$1,000). Accordingly, A may
claim depreciation deductions (including
the additional first-year
depreciation allowance) totaling $9,800,
i.e.,
the purchase price of
the property ($10,000) less
the amount taken into
account as salvage
value ($200).
Example 4.
Assume the same facts as in example (1) except that the taxpayer had taken into account salvage value of only $200 but that the estimated salvage value had actually been $700. The amount of salvage value taken into account by the taxpayer is permissible since the reduction of salvage value by $500 ($700−$200) would be within the limit provided for in section 167 (f), i.e., $1,000 (10% × $10,000).
Example 5.
On January 1, 1963,
taxpayer B, a taxicab operator, traded his old taxicab plus
cash for a new one, which had an estimated useful life of three
years, in a
transaction qualifying as a nontaxable
exchange.
The old taxicab had an
adjusted basis of $2,500. B was
allowed $3,000 for his old taxicab and
paid $1,000 in
cash.
The basis of
the new taxicab for determining
depreciation (as determined under section 167(g) and
§ 1.167(g)-1) is
the adjusted basis of
the old taxicab at
the time of trade-in ($2,500) plus
the additional
cash paid out ($1,000), or $3,500. In computing his
depreciation allowance on
the new taxicab, B may reduce
the amount taken into
account as salvage
value by $350 (10% of $3,500).
Example 6.
Taxpayer C purchases a new asset
for use in his
business on January 1, 1963, for $10,000. At
the time of
purchase,
the asset has an estimated useful life of 10
years and an estimated salvage
value of $1,500. C elects to compute his
depreciation allowance for
the asset by
the declining balance method of
depreciation, using a rate of 20% which is twice
the normal straight line rate of 10% (without
adjustment for salvage
value). C files his
income tax returns on a
calendar year basis. In computing his
depreciation allowance for
the year 1966, C changes his method of determining
the depreciation allowance for
the asset from
the declining balance method to
the straight line method (in which salvage
value is accounted for in determining
the annual
depreciation allowances) in accordance with
the provisions of section 167(e) and paragraph (b) of
§ 1.167(e)-1. He also wishes to reduce
the amount of salvage
value taken into
account in accordance with
the provisions of section 167(f) and this section. At
the close of
the year 1966,
the only
reductions reflected in
the basis of
the asset are for
depreciation allowances. Thus, C may reduce
the amount of salvage
value taken into
account by $1,000 (10% × $10,000,
the basis of
the asset when it was acquired), and, therefore, will
account for salvage
value of only $500 in computing his
depreciation allowance for
the asset in 1966 and
subsequent years.
Example 7.
Taxpayer D purchases a station wagon for his personal use on January 1, 1962, for $4,500. On January 1, 1963, D converts
the use of
the station wagon to his
business, and at that time it has an estimated useful life of 4
years, an estimated salvage
value of $500, and a
basis of $3,000 (as determined under section 167 (g) and
§ 1.167 (g)-1). Thus, for purposes of section 167 (f) and this section, D is deemed to have acquired
the station wagon on January 1, 1963. D elects
the straight line method of depreciation in computing
the depreciation allowance for
the station wagon and also wishes to reduce
the amount of salvage
value taken into
account in accordance with
the provisions of section 167(f) and this section. Accordingly, D may reduce
the amount of salvage
value taken into
account by $300 (10% of $3,000). D files his
income tax returns on a
calendar year basis. His
depreciation allowance for
the year 1963 would be computed as follows:
| Basis for depreciation |
|
$3,000
|
| Less:
|
|
|
| Salvage value |
$500
|
|
| Reduction permitted by section 167(f) |
300
|
|
|
|
200
|
| Amount to be depreciated over the useful life |
2,800 |
D's depreciation allowance on the station wagon for the year 1963 would be $700 ($2,800 divided by 4, the remaining useful life).
