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Useful life is an estimate of the number of years an asset can be expected to remain in service. Tax agencies like the Internal Revenue Service expect taxpayers to use this estimate when calculating depreciation for tax deductions, and publish depreciation tables for the purpose of determining the useful life of various assets. In actuality, an asset's time in service may vary from the official estimate, depending on a number of factors, but it can be a useful tool for calculating basic depreciation.
Tax authorities base the estimation on average wear, obsolescence, and performance of comparable assets. Things like computers are expected to wear down more quickly than cars and real estate. The useful life can help businesses determine how many years of service they can expect to see from assets, and this may be useful for budgeting as well as filing taxes. With something like office furniture, for example, the business wants to be able to prepare to replace furnishings as they wear out.
Assets may be unusable before their useful life expires. This is common with technology, which can start to deteriorate quickly or become obsolescent even when the hardware and software are still good. Companies upgrading computer systems and other electronics must think ahead to replacement so they can select assets appropriate to their needs and depreciate them accurately for tax purposes.
Depreciation tables are available, along with other publications from tax authorities, in a number of formats. It is often possible to look them up online or to order hard copy publications by phone and email. Accountants also retain up to date information in their offices for personal reference and can assist clients with questions about useful life and related matters. It is important to make sure that a publication is current before referring to it, as outdated information can result in tax mistakes.
Taxpayers must be careful with claiming depreciation, as it can be a tax minefield. It is important to read and understand all relevant tax publications to make sure it is done right. Errors will result in having to file a new tax return, usually with fees charged as penalty for inaccuracies. If the government believes a taxpayer deliberately misstated information to evade taxes, fines and jail time could be potential penalties if tax authorities launch an investigation and can prove wrongdoing. Any inaccuracies should be corrected as quickly as possible with an amended tax return.
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