Useful Life

What does 'Useful Life' mean

Useful life is an estimate of how long one can expect to use an income-producing item in a trade or business setting. Useful life usually refers to the duration for which the item will be useful (to the business), and not how long the property will actually last. Many factors affect a property's useful life, including the frequency of use, the age when acquired and the repair policy and environmental conditions of the business. The useful life for identical types of property will differ from user to user depending on the above factors, as well as additional factors such as foreseeable technological improvements, economic changes and changes in laws.

BREAKING DOWN 'Useful Life'

The IRS employs useful life for estimating the amount of time over which an asset can be depreciated. The estimate is based on certain facts which may change over time. The useful life can be adjusted to reflect these changes; however, the changes must be substantial and there must be clear reason for making the change.

For example, a company purchases a machine Jan. 1, 2007 and estimates it will have a useful life of eight years. In 2011, however, the company realized that improvements in technology will render the machine obsolete by the end of 2012. Now, rather than having a useful life of eight years, the machine has a useful life of six years. The depreciation that has already been reported for years 2007, 2008, 2009 and 2010 cannot be changed, and any amount not yet depreciated as of Dec. 31, 2010 will have to be depreciated over the next two years until the machine is no longer in use.

RELATED TERMS
  1. Economic Life

    The expected period of time during which an asset is useful to ...
  2. Life Expectancy

    Life expectancy in social science is the statistical age until ...
  3. Adjustable Life Insurance

    A type of life insurance that combines features of term and whole ...
  4. Unit of Production Method

    A depreciation procedure used for property that is not in continuous ...
  5. Group Universal Life Policy - GULP

    Universal life insurance that is offered to on a group basis, ...
  6. Listed Property

    A specific class of depreciable property that is subject to a ...
Related Articles
  1. Insurance

    Whole or Term Life Insurance: Which Is Better?

    Learn the difference between term life insurance and whole life insurance. Understand when it is beneficial to buy each type of life insurance.
  2. Options & Futures

    Life Expectancy: It's More Than Just A Number

    Find out how this factor determines your life insurance premiums and affects your payout.
  3. Investing

    How Rental Property Depreciation Works

    It's a bit tricky, but a valuable tool to make your investment pay off.
  4. Investing

    How Does Depreciation Reduce My Tax Bill?

    How the depreciation tax rule can assist real estate investors.
  5. Insurance

    Millennials Guide: Too Young for Life Insurance?

    Unless you have kids, it's easy to think you don't need life insurance Here are the reasons why you might– as well as which type and how much to get.
  6. Insurance

    Which Life Insurance is Right For You?

    Consumers have choices when it comes to life insurance. Knowing your future needs for cash or retirement can make the difference in what you select.
  7. Insurance

    What's Better: Whole Life or Term Insurance?

    Life insurance can be a difficult decision to make, especially for a young adult. Here's a look at the benefits and costs of getting whole life insurance.
  8. Insurance

    Understanding Different Types of Life Insurance

    Understand the various types of life insurance, how each can be used in personal or business financial planning, and for whom they are best-suited.
  9. Insurance

    Getting Your (Insurance) House in Order

    From starting a family to retirement, insurance can play a role in taking care of financial needs. This piece looks at some of the choices you can make.
  10. Options & Futures

    Profit From Unwanted Life Policies With Life Settlement

    With a life settlement you could cash in on your policy money now.
RELATED FAQS
  1. Which consumer goods do Americans buy the most of?

    Explore the various factors that influence estimations of a tangible asset's useful life, as well as standard estimations ... Read Answer >>
  2. What are the different ways to calculate depreciation for tangible assets?

    Learn what depreciation is and how to calculate it using the straight line method, declining balance method, and the sum-of-the ... Read Answer >>
  3. Is depreciation only used for tangible assets?

    Learn if tangible assets can be depreciated, as well as what other assets are eligible for depreciation so you can account ... Read Answer >>
  4. Are noncurrent assets depreciated?

    Learn about depreciation, why noncurrent assets are depreciated and how to calculate depreciation expenses using a straight-line ... Read Answer >>
  5. When should I use depreciation expense instead of accumulated depreciation?

    Distinguish differences between depreciation expense, which is reported on the income statement, and accumulated depreciation ... Read Answer >>
  6. How is salvage value used in depreciation calculations?

    Learn how an asset's salvage value is subtracted from its initial cost to determine the amount by which an asset is depreciated ... Read Answer >>
Hot Definitions
  1. Physical Capital

    Physical capital is one of the three main factors of production in economic theory. It consists of manmade goods that assist ...
  2. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  3. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  4. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  5. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  6. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
Trading Center