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.

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