26 U.S.C. § 167 : US Code - Section 167: Depreciation

Search 26 U.S.C. § 167 : US Code - Section 167: Depreciation

(a) General rule
There shall be allowed as a depreciation deduction a reasonable
allowance for the exhaustion, wear and tear (including a reasonable
allowance for obsolescence) -
(1) of property used in the trade or business, or
(2) of property held for the production of income.
(b) Cross reference
For determination of depreciation deduction in case of
property to which section 168 applies, see section 168.
(c) Basis for depreciation
(1) In general
The basis on which exhaustion, wear and tear, and obsolescence
are to be allowed in respect of any property shall be the
adjusted basis provided in section 1011, for the purpose of
determining the gain on the sale or other disposition of such
property.
(2) Special rule for property subject to lease
If any property is acquired subject to a lease -
(A) no portion of the adjusted basis shall be allocated to
the leasehold interest, and
(B) the entire adjusted basis shall be taken into account in
determining the depreciation deduction (if any) with respect to
the property subject to the lease.
(d) Life tenants and beneficiaries of trusts and estates
In the case of property held by one person for life with
remainder to another person, the deduction shall be computed as if
the life tenant were the absolute owner of the property and shall
be allowed to the life tenant. In the case of property held in
trust, the allowable deduction shall be apportioned between the
income beneficiaries and the trustee in accordance with the
pertinent provisions of the instrument creating the trust, or, in
the absence of such provisions, on the basis of the trust income
allocable to each. In the case of an estate, the allowable
deduction shall be apportioned between the estate and the heirs,
legatees, and devisees on the basis of the income of the estate
allocable to each.
(e) Certain term interests not depreciable
(1) In general
No depreciation deduction shall be allowed under this section
(and no depreciation or amortization deduction shall be allowed
under any other provision of this subtitle) to the taxpayer for
any term interest in property for any period during which the
remainder interest in such property is held (directly or
indirectly) by a related person.
(2) Coordination with other provisions
(A) Section 273
This subsection shall not apply to any term interest to which
section 273 applies.
(B) Section 305(e)
This subsection shall not apply to the holder of the dividend
rights which were separated from any stripped preferred stock
to which section 305(e)(1) applies.
(3) Basis adjustments
If, but for this subsection, a depreciation or amortization
deduction would be allowable to the taxpayer with respect to any
term interest in property -
(A) the taxpayer's basis in such property shall be reduced by
any depreciation or amortization deductions disallowed under
this subsection, and
(B) the basis of the remainder interest in such property
shall be increased by the amount of such disallowed deductions
(properly adjusted for any depreciation deductions allowable
under subsection (d) to the taxpayer).
(4) Special rules
(A) Denial of increase in basis of remainderman
No increase in the basis of the remainder interest shall be
made under paragraph (3)(B) for any disallowed deductions
attributable to periods during which the term interest was held
-
(i) by an organization exempt from tax under this subtitle,
or
(ii) by a nonresident alien individual or foreign
corporation but only if income from the term interest is not
effectively connected with the conduct of a trade or business
in the United States.
(B) Coordination with subsection (d)
If, but for this subsection, a depreciation or amortization
deduction would be allowable to any person with respect to any
term interest in property, the principles of subsection (d)
shall apply to such person with respect to such term interest.
(5) Definitions
For purposes of this subsection -
(A) Term interest in property
The term "term interest in property" has the meaning given
such term by section 1001(e)(2).
(B) Related person
The term "related person" means any person bearing a
relationship to the taxpayer described in subsection (b) or (e)
of section 267.
(6) Regulations
The Secretary shall prescribe such regulations as may be
necessary to carry out the purposes of this subsection, including
regulations preventing avoidance of this subsection through cross-
ownership arrangements or otherwise.
(f) Treatment of certain property excluded from section 197
(1) Computer software
(A) In general
If a depreciation deduction is allowable under subsection (a)
with respect to any computer software, such deduction shall be
computed by using the straight line method and a useful life of
36 months.
(B) Computer software
For purposes of this section, the term "computer software"
has the meaning given to such term by section 197(e)(3)(B);
except that such term shall not include any such software which
is an amortizable section 197 intangible.
(C) Tax-exempt use property subject to lease
In the case of computer software which would be tax-exempt
use property as defined in subsection (h) of section 168 if
such section applied to computer software, the useful life
under subparagraph (A) shall not be less than 125 percent of
the lease term (within the meaning of section 168(i)(3)).
(2) Certain interests or rights acquired separately
If a depreciation deduction is allowable under subsection (a)
with respect to any property described in subparagraph (B), (C),
or (D) of section 197(e)(4), such deduction shall be computed in
accordance with regulations prescribed by the Secretary. If such
property would be tax-exempt use property as defined in
subsection (h) of section 168 if such section applied to such
property, the useful life under such regulations shall not be
less than 125 percent of the lease term (within the meaning of
section 168(i)(3)).
(3) Mortgage servicing rights
If a depreciation deduction is allowable under subsection (a)
with respect to any right described in section 197(e)(6), such
deduction shall be computed by using the straight line method and
a useful life of 108 months.
(g) Depreciation under income forecast method
(1) In general
If the depreciation deduction allowable under this section to
any taxpayer with respect to any property is determined under the
income forecast method or any similar method -
(A) the income from the property to be taken into account in
determining the depreciation deduction under such method shall
be equal to the amount of income earned in connection with the
property before the close of the 10th taxable year following
the taxable year in which the property was placed in service,
(B) the adjusted basis of the property shall only include
amounts with respect to which the requirements of section
461(h) are satisfied,
(C) the depreciation deduction under such method for the 10th
taxable year beginning after the taxable year in which the
property was placed in service shall be equal to the adjusted
basis of such property as of the beginning of such 10th taxable
year, and
(D) such taxpayer shall pay (or be entitled to receive)
interest computed under the look-back method of paragraph (2)
for any recomputation year.
(2) Look-back method
The interest computed under the look-back method of this
paragraph for any recomputation year shall be determined by -
(A) first determining the depreciation deductions under this
section with respect to such property which would have been
allowable for prior taxable years if the determination of the
amounts so allowable had been made on the basis of the sum of
the following (instead of the estimated income from such
property) -
(i) the actual income earned in connection with such
property for periods before the close of the recomputation
year, and
(ii) an estimate of the future income to be earned in
connection with such property for periods after the
recomputation year and before the close of the 10th taxable
year following the taxable year in which the property was
placed in service,
(B) second, determining (solely for purposes of computing
such interest) the overpayment or underpayment of tax for each
such prior taxable year which would result solely from the
application of subparagraph (A), and
(C) then using the adjusted overpayment rate (as defined in
section 460(b)(7)), compounded daily, on the overpayment or
underpayment determined under subparagraph (B).
For purposes of the preceding sentence, any cost incurred after
the property is placed in service (which is not treated as a
separate property under paragraph (5)) shall be taken into
account by discounting (using the Federal mid-term rate
determined under section 1274(d) as of the time such cost is
incurred) such cost to its value as of the date the property is
placed in service. The taxpayer may elect with respect to any
property to have the preceding sentence not apply to such
property.
(3) Exception from look-back method
Paragraph (1)(D) shall not apply with respect to any property
which had a cost basis of $100,000 or less.
(4) Recomputation year
For purposes of this subsection, except as provided in
regulations, the term "recomputation year" means, with respect to
any property, the 3d and the 10th taxable years beginning after
the taxable year in which the property was placed in service,
unless the actual income earned in connection with the property
for the period before the close of such 3d or 10th taxable year
is within 10 percent of the income earned in connection with the
property for such period which was taken into account under
paragraph (1)(A).
(5) Special rules
(A) Certain costs treated as separate property
For purposes of this subsection, the following costs shall be
treated as separate properties:
(i) Any costs incurred with respect to any property after
the 10th taxable year beginning after the taxable year in
which the property was placed in service.
(ii) Any costs incurred after the property is placed in
service and before the close of such 10th taxable year if
such costs are significant and give rise to a significant
increase in the income from the property which was not
included in the estimated income from the property.
(B) Syndication income from television series
In the case of property which is 1 or more episodes in a
television series, income from syndicating such series shall
not be required to be taken into account under this subsection
before the earlier of -
(i) the 4th taxable year beginning after the date the first
episode in such series is placed in service, or
(ii) the earliest taxable year in which the taxpayer has an
arrangement relating to the future syndication of such
series.
(C) Special rules for financial exploitation of characters,
etc.
For purposes of this subsection, in the case of television
and motion picture films, the income from the property shall
include income from the exploitation of characters, designs,
scripts, scores, and other incidental income associated with
such films, but only to the extent that such income is earned
in connection with the ultimate use of such items by, or the
ultimate sale of merchandise to, persons who are not related
persons (within the meaning of section 267(b)) to the taxpayer.
(D) Collection of interest
For purposes of subtitle F (other than sections 6654 and
6655), any interest required to be paid by the taxpayer under
paragraph (1) for any recomputation year shall be treated as an
increase in the tax imposed by this chapter for such year.
(E) Treatment of distribution costs
For purposes of this subsection, the income with respect to
any property shall be the taxpayer's gross income from such
property.
(F) Determinations
For purposes of paragraph (2), determinations of the amount
of income earned in connection with any property shall be made
in the same manner as for purposes of applying the income
forecast method; except that any income from the disposition of
such property shall be taken into account.
(G) Treatment of pass-thru entities
Rules similar to the rules of section 460(b)(4) shall apply
for purposes of this subsection.
(6) Limitation on property for which income forecast method may
be used
The depreciation deduction allowable under this section may be
determined under the income forecast method or any similar method
only with respect to -
(A) property described in paragraph (3) or (4) of section
168(f),
(B) copyrights,
(C) books,
(D) patents, and
(E) other property specified in regulations.
Such methods may not be used with respect to any amortizable
section 197 intangible (as defined in section 197(c)).
(7) Treatment of participations and residuals
(A) In general
For purposes of determining the depreciation deduction
allowable with respect to a property under this subsection, the
taxpayer may include participations and residuals with respect
to such property in the adjusted basis of such property for the
taxable year in which the property is placed in service, but
only to the extent that such participations and residuals
relate to income estimated (for purposes of this subsection) to
be earned in connection with the property before the close of
the 10th taxable year referred to in paragraph (1)(A).
(B) Participations and residuals
For purposes of this paragraph, the term "participations and
residuals" means, with respect to any property, costs the
amount of which by contract varies with the amount of income
earned in connection with such property.
(C) Special rules relating to recomputation years
If the adjusted basis of any property is determined under
this paragraph, paragraph (4) shall be applied by substituting
"for each taxable year in such period" for "for such period".
(D) Other special rules
(i) Participations and residuals
Notwithstanding subparagraph (A), the taxpayer may exclude
participations and residuals from the adjusted basis of such
property and deduct such participations and residuals in the
taxable year that such participations and residuals are paid.
(ii) Coordination with other rules
Deductions computed in accordance with this paragraph shall
be allowable notwithstanding paragraph (1)(B), section 263,
263A, 404, 419, or 461(h).
(E) Authority to make adjustments
The Secretary shall prescribe appropriate adjustments to the
basis of property and to the look-back method for the
additional amounts allowable as a deduction solely by reason of
this paragraph.
(h) Amortization of geological and geophysical expenditures
(1) In general
Any geological and geophysical expenses paid or incurred in
connection with the exploration for, or development of, oil or
gas within the United States (as defined in section 638) shall be
allowed as a deduction ratably over the 24-month period beginning
on the date that such expense was paid or incurred.
(2) Half-year convention
For purposes of paragraph (1), any payment paid or incurred
during the taxable year shall be treated as paid or incurred on
the mid-point of such taxable year.
(3) Exclusive method
Except as provided in this subsection, no depreciation or
amortization deduction shall be allowed with respect to such
payments.
(4) Treatment upon abandonment
If any property with respect to which geological and
geophysical expenses are paid or incurred is retired or abandoned
during the 24-month period described in paragraph (1), no
deduction shall be allowed on account of such retirement or
abandonment and the amortization deduction under this subsection
shall continue with respect to such payment.
(i) Cross references
(1) For additional rule applicable to depreciation of
improvements in the case of mines, oil and gas wells, other
natural deposits, and timber, see section 611.
(2) For amortization of goodwill and certain other
intangibles, see section 197.