When properly applied, ARM suggests that component depreciation
may be preferable because it likely "will result in a more accurate determination of depreciation and will facilitate accounting when the component is replaced." Its use in the United States, however, appears to be primarily motivated by tax benefits.
38 definition of personal property, which allowed the taxpayer to use a cost technique that resulted in the classification of many parts of its hospitals as personal property The IRS eventually agreed that cost segregation does not constitute component depreciation
. Current IRS revenue procedures and audit manuals outline what is required to produce a cost-segregation report that passes IRS scrutiny
In this case, it is possible to use the component depreciation
(since 2009 also in the Czech Republic), which more accurately shows the fact.
The tax position concerning the component depreciation
deduction qualifies for recognition because the MLTN test is met.
In decision 1999-008, the IRS reluctantly agreed that cost segregation does not constitute component depreciation
. Thus, the IRS has accepted cost segregation as a qualified method of allocating costs to personal property; however, in Chief Counsel Advice Memorandum 199921045, the IRS states in part that an "accurate cost-segregation study may not be based on non-contemporaneous records, reconstructed data, or taxpayer's estimates or assumptions that have no supporting records."
They prohibited the use of component depreciation
and created a new method referred to as Modified Accelerated Cost Recovery System or MACRS.
Step three consists of estimating "the depreciation that has accrued from physical, functional, and external causes."(4) He notes that the crucial difference between the use of the breakdown method of computing physical depreciation and using the simpler age-life method is that the breakdown method employs estimates of physical life to compute building component depreciation
whereas the age-life method utilizes a ratio of effective age to economic life.
. Under IFRS, each constituent part of an item of PP&E that is material with respect to the total cost of the asset must be depreciated separate-ly--a process known as component depreciation
The introduction of the accelerated cost recovery system (ACRS) and the modified accelerated cost recovery system (MACRS) eliminated the use of component depreciation
, but not the use of cost segregation.
A key and controversial component of that, he said, is component depreciation
, the concept that different components of PPE depreciate at different rates.
Whether it was referred to as an investment tax credit (ITC), component depreciation
, or cost segregation, the primary objective has always been increased cash flow.
HCA convinced the court that breaking out specific portions of the cost of a building and assigning them shorter depreciable lives did not violate the Economic Recovery Tax Act of 1981's ban on component depreciation
, but was an appropriate segregation of costs under the old investment tax credit rules.