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Information regarding the Depreciation of Assets 1 (November 21, 2013)

handle is hein.congrec/cbo11418 and id is 1 raw text is: O CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director U.S. Congress Washington, DC 20515 November 21, 2013 Honorable Max Baucus Chairman Committee on Finance United States Senate Washington, DC 20510 Re: Information on the Depreciation of Assets Dear Mr. Chairman: This letter responds to a request by the committee staff that the Congressional Budget Office (CBO), in consultation with the staff of the Joint Committee on Taxation, provide information regarding the depreciation of tangible assets (the rate at which assets wear out or become obsolete). The current tax code contains a schedule of depreciation rates, with different rates assigned to different types of assets. Taxpayers use those rates to compute a depreciation deduction-that is, the dollar amount of asset depreciation that can be subtracted from their gross income-and thus reduce the amount of taxes they owe. Those tax depreciation rates, however, often differ from the rate of actual (or economic) depreciation. The first item requested by the committee staff was a categorization into five groups of the asset classes specified by the Internal Revenue Service (in Revenue Procedures 87-56 and 88-22). Four of the groups (referred to as pools in the request) were defined by the committee staff largely in terms of a specified range of economic depreciation rates; the fifth group consists of real property, such as buildings, land, and certain other structures. In a few cases, the committee staff assigned certain types of assets to specific pools regardless of their economic depreciation rate. CBO computed the weighted average economic depreciation rate within each of the four pools. The list of asset classes in each group and the weighted average economic depreciation rates for the four pools are shown in Table 1.' The committee staff also asked CBO to make the following two adjustments to the weighted average rates of economic depreciation in each pool: *The first was an adjustment for inflation. The average economic depreciation rates shown in Table 1 account for the decline in asset values 1The seven asset classes that were assigned by the committee staff based on factors other than their economic depreciation rates are shown in italics in Table 1. www.cbo.gov

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