26 USC 167 - Depreciation

View all text of Part VI [§ 161 - § 199A]

§ 167. Depreciation

(a) General ruleThere 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

(1) In general

(2) Special rule for property subject to leaseIf 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

(e) Certain term interests not depreciable

(1) In general

(2) Coordination with other provisions

(A) Section 273

(B) Section 305(e)

(3) Basis adjustmentsIf, 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 remaindermanNo 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)

(5) DefinitionsFor purposes of this subsection—

(A) Term interest in property

(B) Related person

(6) Regulations

(f) Treatment of certain property excluded from section 197

(1) Computer software

(A) In general

(B) Computer software

(2) Certain interests or rights acquired separately

(3) Mortgage servicing rights

(g) Depreciation under income forecast method

(1) In generalIf 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 methodThe 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

(4) Recomputation year

(5) Special rules

(A) Certain costs treated as separate propertyFor 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 seriesIn 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.

(D) Collection of interest

(E) Treatment of distribution costs

(F) Determinations

(G) Treatment of pass-thru entities

(6) Limitation on property for which income forecast method may be usedThe 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,

(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

(B) Participations and residuals

(D) Other special rules

(i) Participations and residuals

(ii) Coordination with other rules

(E) Authority to make adjustments

(8) Special rules for certain musical works and copyrights

(A) In generalIf an election is in effect under this paragraph for any taxable year, then, notwithstanding paragraph (1), any expense which—

(i) is paid or incurred by the taxpayer in creating or acquiring any applicable musical property placed in service during the taxable year, and

(ii) is otherwise properly chargeable to capital account,

shall be amortized ratably over the 5-year period beginning with the month in which the property was placed in service. The preceding sentence shall not apply to any expense which, without regard to this paragraph, would not be allowable as a deduction.

(B) Exclusive method

(i) In general

(ii) ExceptionsSuch term shall not include any property—(I) with respect to which expenses are treated as qualified creative expenses to which section 263A(h) applies,(II) to which a simplified procedure established under section 263A(i)(2) 1

1 See References in Text note below.

applies, or(III) which is an amortizable section 197 intangible (as defined in section 197(c)).

(D) Election

(E) Termination

(h) Amortization of geological and geophysical expenditures

(1) In general

(2) Half-year convention

(3) Exclusive method

(4) Treatment upon abandonment

(5) Special rule for major integrated oil companies

(A) In general

(B) Major integrated oil companyFor purposes of this paragraph, the term “major integrated oil company” means, with respect to any taxable year, a producer of crude oil—

(i) which has an average daily worldwide production of crude oil of at least 500,000 barrels for the taxable year,

(ii) which had gross receipts in excess of $1,000,000,000 for its last taxable year ending during calendar year 2005, and

(iii) to which subsection (c) of section 613A does not apply by reason of paragraph (4) of section 613A(d), determined—(I) by substituting “15 percent” for “5 percent” each place it occurs in paragraph (3) of section 613A(d), and(II) without regard to whether subsection (c) of section 613A does not apply by reason of paragraph (2) of section 613A(d).

For purposes of clauses (i) and (ii), all persons treated as a single employer under subsections (a) and (b) of section 52 shall be treated as 1 person and, in case of a short taxable year, the rule under section 448(c)(3)(B) shall apply.

(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.

(Aug. 16, 1954, ch. 736, 68A Stat. 51; Pub. L. 85–866, title I, § 89(b), Sept. 2, 1958, 72 Stat. 1665; Pub. L. 87–834, § 13(b), (c)(1), Oct. 16, 1962, 76 Stat. 1034; Pub. L. 89–800, § 2, Nov. 8, 1966, 80 Stat. 1513; Pub. L. 90–26, §§ 1, 2(b), June 13, 1967, 81 Stat. 57, 58; Pub. L. 91–172, title IV, § 441(a), title V, § 521(a), (d), Dec. 30, 1969, 83 Stat. 625, 649, 653; Pub. L. 92–178, title I, § 109(a), Dec. 10, 1971, 85 Stat. 508; Pub. L. 93–625, § 3(c), Jan. 3, 1975, 88 Stat. 2109; Pub. L. 94–455, title II, §§ 202(c)(3), 203(a), title XIX, §§ 1901(a)(27), 1906(b)(13)(A), title XXI, § 2124(c)(1), (d)(1), Oct. 4, 1976, 90 Stat. 1530, 1768, 1834, 1918; Pub. L. 95–171, § 4(a), Nov. 12, 1977, 91 Stat. 1355; Pub. L. 95–600, title III, §§ 312(c)(4), 367, title VII, § 701(f)(4), (6), Nov. 6, 1978, 92 Stat. 2826, 2857, 2901, 2902; Pub. L. 95–615, § 7(a), Nov. 8, 1978, 92 Stat. 3098; Pub. L. 95–618, title III, § 301(d)(3), (e)(1), Nov. 9, 1978, 92 Stat. 3200, 3201; Pub. L. 96–541, §§ 2(c), (d), 3, Dec. 17, 1980, 94 Stat. 3204, 3205; Pub. L. 96–613, § 2(a), Dec. 28, 1980, 94 Stat. 3579; Pub. L. 97–34, title II, §§ 203(a)–(c)(1), (d), 209(d)(3), 212(d)(1), 264(a), Aug. 13, 1981, 95 Stat. 221, 222, 227, 239, 264; Pub. L. 97–424, title V, § 541(a)(2), Jan. 6, 1983, 96 Stat. 2192; Pub. L. 98–369, div. A, title X, § 1064, July 18, 1984, 98 Stat. 1047; Pub. L. 99–514, title II, § 201(d)(1), title XV, § 1511(c)(4), title XVIII, § 1809(d)(1), Oct. 22, 1986, 100 Stat. 2139, 2745, 2821; Pub. L. 100–647, title I, § 1002(a)(22), (24), (31), (i)(1), Nov. 10, 1988, 102 Stat. 3356, 3357, 3370; Pub. L. 101–239, title VII, §§ 7622(b)(1) [(d)(1)], 7645(a), Dec. 19, 1989, 103 Stat. 2378, 2381; Pub. L. 101–508, title XI, § 11812(a), (b)(1), Nov. 5, 1990, 104 Stat. 1388–534; Pub. L. 103–66, title XIII, §§ 13206(c)(2), 13261(b), (f)(1), Aug. 10, 1993, 107 Stat. 466, 538, 539; Pub. L. 104–188, title I, § 1604(a), Aug. 20, 1996, 110 Stat. 1836; Pub. L. 105–34, title X, § 1086(a), Aug. 5, 1997, 111 Stat. 957; Pub. L. 108–357, title II, § 242(a), (b), title VIII, § 847(b)(1), (2), Oct. 22, 2004, 118 Stat. 1438, 1439, 1601; Pub. L. 109–58, title XIII, § 1329(a), Aug. 8, 2005, 119 Stat. 1020; Pub. L. 109–135, title IV, § 412(r), Dec. 21, 2005, 119 Stat. 2638; Pub. L. 109–222, title II, § 207(a), title V, § 503(a), May 17, 2006, 120 Stat. 350, 354; Pub. L. 110–140, title XV, § 1502(a), Dec. 19, 2007, 121 Stat. 1800; Pub. L. 110–172, § 11(a)(13), Dec. 29, 2007, 121 Stat. 2485.)