Most Depreciation Adjustments

Most Depreciation Adjustments

February 01, 2004

Most depreciation adjustments that US companies make on their own will require advance approval from the government, the IRS asserted in late December.

Any company that plans a “change in accounting method” in how it computes its taxes must get approval first from the IRS. Such approvals can take more than a year. IRS regulations say it is a change in accounting method to change the timing of when income or deductions are reported, but it is not such a change to adjust the “useful life” over which an asset is depreciated. This distinction has led some US courts to conclude that reclassifying a project from — say — 15-year property to 5-year property for depreciation is not a change in accounting method because it is the functional equivalent of altering the useful life.

The IRS does not like these decisions. In late December, it modified its regulations to require that most depreciation adjustments be treated as accounting method changes. The two situations where it said it would not require advance approval are where the taxpayer decides that an asset was placed in service on a different date than he thought earlier or where an asset is converted from personal to business use (or vice versa). The new rules appeared in the Federal Register on January 2.

Keith Martin