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Name: Ken
Status: other
Age: 50s
Location: N/A
Country: N/A
Date: N/A 


Question:
I am an analyst for a tax assessor in Florida. We are in the process of recalibrating our depreciation tables for tangible personal property and are trying to determine the effective economic life of each equipment. We hope to do this through analysis of the assets contained in our taxpayer database. We have sorted the assets by equipment type and by year acquired. For example, for the equipment category "Forklifts", we have found that there are 2,534 forklifts reported by our taxpayers. They have been acquired between 1955 and 1998. Approximately 25% of the total have been acquired since 1997; 50% since 1994 and 75% since 1991. Is there a statistical test or tests which may be applied that would aid us in concluding what the economic life for the asset categories should be? Thank you.



Replies:
Ken,

Since the method you choose for your depreciation will ultimately have to be ok'd by the IRS, I would suggest you instead direct this question to them. It is usually a wise decision to get an agent's name and ID # so that if your returns are questions you can describe who gave you the advice you elected to follow. This can be useful in avoiding or reducing penalties in the event errors were made.

Richard R. Rupnik
Internal Quality Auditor
Lucent Technologies


Hello,

This is an interesting concept; using the age of capital goods held by a populace to arrive at a fair market value and thus a depreciation table. However, I wonder if the effective economic life of an equipment can be ascertained this way.

The reason is this: the method will be heavily influenced by such factors as the type of goods, economic conditions (local and global), interest rates, competition, changes in the scope and nature of work in which the equipment is used, technological changes, sample size, etc. If one can adjust for these, then a fair assessment could be made.

If one ignores these factors, then a simple histogram (plot of the percentage of equipment that are older than 0,1, 2, ..., 50 years) can be used. Based on the data you provided, it seems that there is a liner 8% per year acquisition rate for the past 9 years. Maybe one can extrapolate this linearly to give a life of 12.5 years for the forklifts. As a test, one can check this against the price of used forklifts recently sold in your area.

It is obvious that if interest rates double, the slope of the afore-mentioned curve will change (reduced), indicating a slower (or possibly non-linear) depreciation rate.

In any case, I suppose experts in the field have thoroughly studied many depreciation methods including this one. I just checked the Internet and found that there is a Society of Depreciation Professionals (http://www.depr.org) that you may want to contact regarding your question.

Good luck,

AK

Dr. Ali Khounsary
Advanced Photon Source
Argonne National Laboratory



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