RP Equipment Depreciation (Book and Tax)

From: Charles V. Norton (cnorton@ncpleasing.com)
Date: Wed Nov 18 1998 - 22:58:11 EET


Ross,

Your message referenced "short technology life" and I think you're correct.
 The useful economic life for the majority of RP equipment is short and
likely to become shorter. There are major exceptions; the SLA 500 and SLS
2500. Quite a few machines have a realized resale value below 25% of
acquisition after just two years. Call equipment dealers for take-out
offers if you need examples.

For book income purposes, a 3 to 5 year writeoff to zero salvage seems
correct.

For tax purposes, 5 year MACRS is probably as aggressive as it gets...which
means a tax basis of 29.8% after 36 months; i.e. the cumulative tax
depreciation over 36 months is 70.2% of cost.

Three year tax depreciation is very unlikely. Section 30.21 of the tax
code follows:

"Manufacture of Finished Plastic Products-Special Tools:
Includes assets defined as special tools; such as jigs, dies, fixtures,
molds, patterns, gauges and specialty transfer and shipping devices, used
in activities as defined in class 30.2. (Manufacture of Finished Plastic
Parts) Special tools are specifically designed for the production or
processing of particular parts and have no significant utilitarian value
and cannot be adapted to further or different use after changes or
improvements are made in the model design of the particular part produced
by the special tools. Does not include general purpose small tools such as
wrenches and drills, both hand and power driven, and other general purpose
equipment such as conveyors, transfer equipment and materials handling
devices."

"...cannot be adapted to further or different use" would probably be a
tough sell to the IRS given that RP machines have cross industry
applications. The point of this is that an equipment lease can be used to
'compress' both book and tax depreciation into the term of the lease.

Charlie

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