1.167(f)-1 Reduction of salvage value taken into account for certain personal property.
§ 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).
[T.D. 6712, 29 FR 3654, Mar. 24, 1964, as amended by T.D. 6838, 30
FR 9064, July 20, 1965]