Depreciable cost
Total part of a capital asset’s cost that will be claimed as depreciation expense over the asset’s depreciable life. This is usually:
Depreciable cost = Total cost of asset - Residual Value
Most depreciation schedules are applied to the depreciable cost rather than total cost, but the double declining balance method (DDB) is an exception, as is MACRS, a special case of DDB (see depreciation for more on these methods). For DDB and MACRS, depreciation percentages are applied against total cost.
When using any schedule besides DDB and MACRS, residual value (also called salvage value) plays an important role in determining depreciation expenses, tax savings from depreciation and, possibly, the value of a cash inflow at the end of depreciation. Residual value is the estimated net value of the asset that would or could be received if the asset were retired or scrapped. Residual (or salvage) value of an asset has two important tax considerations:
- An asset may NOT normally be depreciated below its estimated residual (salvage) value
- If, at the end of depreciable life, the realized salvage value of an asset differs from the book value, a tax adjustment will usually be required.
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