Rev. Proc. 62-1
Rev. Proc. 62-1; 1962-1 C.B. 415
- LanguageEnglish
- Tax Analysts Electronic Citationnot available
Obsoleted by Rev. Proc. 72-56 Amplified by Rev. Proc. 62-7
SECTION 1. PURPOSE.
The purpose of this Revenue Procedure is (1) to set forth a schedule of revised average useful lives which may be used as a guide in the computation of depreciation for selected major items of textile machinery and equipment, and (2) to explain the effect of the issuance of the schedule on the remaining useful lives of such items of textile machinery and equipment now in use.
SEC. 2. BACKGROUND.
.01 In January 1942, the Internal Revenue Service published a revised edition of Bulletin `F' setting forth suggested average useful lives for many items of property, including textile machinery and equipment.
.02 On May 2, 1961, the President of the United States announced a program of assistance to the textile industry, designed to meet a wide range of problems the industry faces as a result of rapid technological change, shifts in consumer preference, and increasing international competition. Included in the President's over-all program to be carried out by a number of agencies of the Government was a request to the Treasury Department to review existing depreciation allowances on textile machinery.
.03 Accordingly, an intensive review was made by Treasury and Service officials of the average useful lives of machinery and equipment used in the domestic textile industry. This review included independent studies by Service engineers, inspection trips to several textile mills and to the facilities of textile machinery manufacturers, and a careful evaluation of the facts relating to recent technological innovations in the industry. In addition, meetings were held with representatives of the industry.
SEC. 3. REVISED AVERAGE USEFUL LIVES.
As a consequence of these studies and based upon existing law and regulations, the previously-suggested estimated average useful lives which will be considered the reasonably normal period of usefulness in the usual experience of users of several types of textile machinery and equipment have been revised as follows:
Average useful life (years)
_______________________________________________________
Cards................. 15 Looms............... 15
Combers............... 15 Opening, blending,
Drawing frames........ 15 feeding equipment.. 15
Finishing equipment: Roving frames....... 15
Bleaching..... 12 Slashers............ 15
Dry finishing. 12 Spinning frames..... 15
Drying........ 12 Twisters............ 15
Dyeing........ 12 Winders............. 15
Washing....... 12
_______________________________________________________
SEC. 4. SCOPE AND OBJECTIVE.
.01 The revised average useful lives, shown in section 3, will be applicable only for those taxable years for which returns are due to be filed (not including any extensions of time) on or after October 11, 1961, the date the President announced the results of the above study.
.02 The revised average useful lives generally will be applicable to new machinery and equipment acquired by a taxpayer during taxable years described in paragraph .01 above.
.03 Some revision of the remaining useful lives of machinery and equipment acquired new and placed in use by a taxpayer during a taxable year prior to the first taxable year to which the revised average useful lives are applicable, as explained in paragraph .01 above, may also be necessary to reflect the results of this study; but in the case of property having a remaining useful life of five years or less, an adjustment will be made only where the taxpayer can support the use of a shorter life.
.04 No departure is intended from the rule expressed in section 1.167(a)-1 of the Income Tax Regulations, that the useful life of an asset for depreciation purposes is the period over which it may reasonably be expected to be useful to the taxpayer in his trade or business or in the production of his income. The revised suggested average useful lives reflect the obsolescence which this study has recognized. Such lives may be used by any taxpayer who shows the firm intention to follow replacement practices which justify his use of these lives. However, under section 1.167(a)-1(b) of the regulations the estimated useful life of property is subject to modification after lapse of a reasonable period of time by reason of conditions known to exist at the end of the taxable year of modification, such as where it is found that the taxpayer's experience, including his replacement practice, does not justify the useful lives used by the taxpayer. For purposes of applying the preceding sentence, Revenue Rulings 90 and 91, C.B. 1953-1, pages 43 and 44, respectively, remain in full force and effect. In any case where a taxpayer can support the use of lives shorter than those shown in the schedule in Section 3, use of the shorter lives will, of course, be permitted.
.05 Salvage will not be redetermined solely on the basis of revisions to useful life made under these new guides. The adoption of the revised average useful lives for textile machinery and equipment will not result in treating the salvage on such items on a basis different from that provided by existing regulations. Any consideration for a redetermination of salvage will depend upon the actual facts in each case.
SEC. 5. PROCEDURE FOR REVISION OF USEFUL LIVES OF EXISTING MACHINERY AND EQUIPMENT.
.01 In order to minimize controversies which could arise from the application of the changed average useful lives to machinery and equipment described in section 4.03 and to promote uniformity in the handling of the determination of allowance depreciation under the various computation methods, the procedure set out below is to be followed.
.02 Straight line .-In cases where a taxpayer is depreciating existing machinery under the straight line method, allowable depreciation will be determined by applying depreciation rates based upon the revised useful lives to the original cost basis, reduced by salvage where appropriate. To illustrate, assume that a machine costing $100,000 and being depreciated over a useful life of 25 years, had been in use for five years. Assume also, for purposes of simplification, that salvage is zero. (However, salvage must be recognized as a factor in the computations, whenever it exists, as provided in the regulations.) For the first five years the machine was depreciated at a four percent rate (25 year life) so that the depreciation reserve totaled $20,000 at the end of that time. The remaining cost to be recovered through the depreciation deduction is, therefore, $80,000. Under the schedule in section 3 the revised useful life for new equipment of this type is found to be 15 years. Under this revised useful life the annual depreciation rate will be 6.667 percent and revised annual depreciation allowable would be $100,000 x .06667 or $6,667. The revised remaining useful life of the machine is thus computed to be 80,000/6,667 or 12 years. The annual depreciation allowance after the change in the useful life is computed as follows:
=====================================================================
Annual Total
Year Computation depreciation depreciation
allowance
---------------------------------------------------------------------
6................ $100,000 X .06667.... $6,667 $26,667
7................ ..................... 6,667 33,334
8................ ..................... 6,667 40,001
9................ ..................... 6,667 46,668
10............... ..................... 6,667 53,335
11............... ..................... 6,667 60,002
12............... ..................... 6,667 66,669
13............... ..................... 6,667 73,336
14............... ..................... 6,667 80,003
15............... ..................... 6,667 86,670
16............... ..................... 6,667 93,337
17............... ..................... 6,663 100,000
---------------------------------------------------------------------
.03 Sum of the years digits .-On existing machinery presently being depreciated under the sum of the years digits method, the remaining useful life is the same as that determined under the straight line method as described in section 5.02. Depreciation allowable after the date of change will then be computed, as provided in section 1.167(b)-3(a) of the regulations, using this remaining useful life. For example, assume the cost of a machine being depreciated over a useful life of 25 years was $100,000 and that the machine had been in use for five years. To simplify the example, assume further that salvage is zero. (However, as provided in the regulations, salvage is to be recognized as a factor in the computation whenever it exists.) The depreciation allowable for the first five years would have been computed as follows:
=====================================================================
Year Computation Annual Total Remaining
depreciation depreciation balance
---------------------------------------------------------------------
1........ $100,000X25/325..... $7,692 $7,692
2........ $100,000X24/325..... 7,385 15,077
3........ Etc................. 7,077 22,154
4........ Etc................. 6,769 28,923
5........ Etc................. 6,462 35,385 $64,615
---------------------------------------------------------------------
The revised useful life for new equipment of this type, as scheduled in section 3, is found to be 15 years. The revised remaining life at the end of five years, as computed under the straight line method in paragraph .02 above, is 12 years. The annual depreciation allowance after the change in the useful life will then be computed as follows:
=====================================================================
Year Computation Annual Total
depreciation depreciation
---------------------------------------------------------------------
6................. $64,615X12/78....... $9,941 $45,326
7................. $64,615X11/78....... 9,113 54,439
8................. $64,615X10/78....... 8,284 62,723
9................. Etc................. 7,456 70,179
10................ Etc................. 6,627 76,806
11-17............. Etc................. ............. ............
---------------------------------------------------------------------
.04 Declining balance method .-Where existing machinery presently is being depreciated under the declining balance method, the remaining useful life is the same as that determined under the straight line method as described in section 5.02. Depreciation allowable after the date of the change will be computed following the procedure set forth in section 1.167(b)-2(c) of the regulations. Assuming the same facts as in the example in paragraph .03 above, the depreciation allowable for the first five years would have been computed as follows:
=====================================================================
Year Computation Annual Total Remaining
depreciation depreciation balance
---------------------------------------------------------------------
1........ $100,000X(.04 x 2).. $8,000 $8,000
2........ $92,000X.08......... 7,360 15,360
3........ $84,640X.08......... 6,771 22,131
4........ Etc................. 6,229 28,360
5........ Etc................. 5,731 340915 $65,909
---------------------------------------------------------------------
The revised useful life for new equipment of this type, as found in section 3, is 15 years. The revised remaining life at the end of five years, as computed under the straight line method in paragraph .02 above, is ......................................... 12 years
Expired life........................................... 5 years
--------
Revised useful life for declining balance computation.. 17 years
The revised rate for declining balance computation is 1 x 2
----- = .1176
17
The annual depreciation allowance after the change in the useful life will then be computed as follows:
=====================================================================
Year Computation Annual Total Remaining
depreciation depreciation balance
---------------------------------------------------------------------
6........ $65,909 X .1176..... $7,751 $41,842 $58,158
7........ $58,158 X .1176..... 6,840 48,682 $51,318
8........ $51,318 X .1176..... 6,035 54,717 .......
9-17..... Etc................. .......... ......... .......
---------------------------------------------------------------------
.05 Remaining useful life of five years or less .-Where, by reason of revisions to remaining useful lives as described above, the remaining useful life of an item of machinery or equipment would be five years or less, remaining useful life of five years will be assigned, except where the taxpayer can substantiate the use of a shorter life. To illustrate, assume that a machine costing $100,000, was originally estimated to have a useful life of 25 years, and had been depreciated under the straight line method for 18 years as of the date of the change. The revised useful life for new assets of this type, under section 3, is 15 years.
Cost............................................. $100,000
Depreciation reserve at date of change
(18 x .04 x $100,000).................... 72,000
--------
Unrecovered cost................................. $ 28,000
Revised annual depreciation allowable (15 year life basis)
$100,000 x .06667 equals $6,667.
28,000
Revised remaining life ------ equals 4.2 years.
6,667
Since the remaining life on the old basis was more than five years (25 minus 18) and the remaining life on the new basis would be less than five years (4.2 years), five years will be the period over which the remaining cost may be recovered.
Revised depreciation rate-straight line method-is $28,000 divided by 5 which gives an annual allowable depreciation deduction of $5,600.
The annual rate on the original cost is 5,6 00/100 ,000 which is 5.6 percent.
The annual depreciation allowable for the remaining five years, under the straight line method is as follows:
=====================================================================
Annual Total
Year Computation depreciation depreciation
allowance
---------------------------------------------------------------------
19............... $100,000 X .056...... $5,600 $77,600
20............... ..................... 5,600 83,200
21............... ..................... 5,600 88,800
22............... ..................... 5,600 94,400
23............... ..................... 5,600 100,000
---------------------------------------------------------------------
Salvage has been assumed to be zero; however, as provided in the regulations, salvage is to be recognized as a factor in the computations whenever it exists.
This rule shall not apply in any case where the remaining term of the useful life as originally determined and used by the taxpayer is less than five years.
SEC. 6. ITEMS OF TEXTILE MACHINERY AND EQUIPMENT NOT LISTED IN SECTION 3.
A study is being made of the average useful lives of other items of textile machinery and equipment not listed in section 3. When this study is completed, the results thereof will be published in the Internal Revenue Bulletin.
SEC. 7. EFFECT ON OTHER DOCUMENTS.
The average useful lives of the items of textile machinery and equipment shown in section 3 above, supersede the lives assigned such items in the 1942 revision of Bulletin `F'.
SEC. 8. INQUIRIES.
Inquiries regarding this Revenue Procedure should be addressed to the Commissioner of Internal Revenue, Washington 25, D.C., Attention: CP:A:UA.
1 Also released as Technical Information Release 350, dated December 18, 1961; amplified by Rev. Proc. 62-7, page 428.
- LanguageEnglish
- Tax Analysts Electronic Citationnot available
