§ 167. Depreciation
(a)
General rule
There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)—
(c)
Basis for depreciation
(1)
In general
The basis on which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section
1011, for the purpose of determining the gain on the sale or other disposition of such property.
(d)
Life tenants and beneficiaries of trusts and estates
In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each. In the case of an estate, the allowable deduction shall be apportioned between the estate and the heirs, legatees, and devisees on the basis of the income of the estate allocable to each.
(e)
Certain term interests not depreciable
(1)
In general
No depreciation deduction shall be allowed under this section (and no depreciation or amortization deduction shall be allowed under any other provision of this subtitle) to the taxpayer for any term interest in property for any period during which the remainder interest in such property is held (directly or indirectly) by a related person.
(3)
Basis adjustments
If, but for this subsection, a depreciation or amortization deduction would be allowable to the taxpayer with respect to any term interest in property—
(4)
Special rules
(5)
Definitions
For purposes of this subsection—
(B)
Related person
The term “related person” means any person bearing a relationship to the taxpayer described in subsection (b) or (e) of section
267.
(f)
Treatment of certain property excluded from section
197
(1)
Computer software
(A)
In general
If a depreciation deduction is allowable under subsection (a) with respect to any computer software, such deduction shall be computed by using the straight line method and a useful life of 36 months.
(2)
Certain interests or rights acquired separately
If a depreciation deduction is allowable under subsection (a) with respect to any property described in subparagraph (B), (C), or (D) of section
197
(e)(4), such deduction shall be computed in accordance with regulations prescribed by the Secretary. If such property would be tax-exempt use property as defined in subsection (h) of section
168 if such section applied to such property, the useful life under such regulations shall not be less than 125 percent of the lease term (within the meaning of section
168
(i)(3)).
(g)
Depreciation under income forecast method
(1)
In general
If the depreciation deduction allowable under this section to any taxpayer with respect to any property is determined under the income forecast method or any similar method—
(A)
the income from the property to be taken into account in determining the depreciation deduction under such method shall be equal to the amount of income earned in connection with the property before the close of the 10th taxable year following the taxable year in which the property was placed in service,
(B)
the adjusted basis of the property shall only include amounts with respect to which the requirements of section
461
(h) are satisfied,
(2)
Look-back method
The interest computed under the look-back method of this paragraph for any recomputation year shall be determined by—
(A)
first determining the depreciation deductions under this section with respect to such property which would have been allowable for prior taxable years if the determination of the amounts so allowable had been made on the basis of the sum of the following (instead of the estimated income from such property)—
(B)
second, determining (solely for purposes of computing such interest) the overpayment or underpayment of tax for each such prior taxable year which would result solely from the application of subparagraph (A), and
(C)
then using the adjusted overpayment rate (as defined in section
460
(b)(7)), compounded daily, on the overpayment or underpayment determined under subparagraph (B).
For purposes of the preceding sentence, any cost incurred after the property is placed in service (which is not treated as a separate property under paragraph (5)) shall be taken into account by discounting (using the Federal mid-term rate determined under section 1274(d) as of the time such cost is incurred) such cost to its value as of the date the property is placed in service. The taxpayer may elect with respect to any property to have the preceding sentence not apply to such property.
(3)
Exception from look-back method
Paragraph (1)(D) shall not apply with respect to any property which had a cost basis of $100,000 or less.
(4)
Recomputation year
For purposes of this subsection, except as provided in regulations, the term “recomputation year” means, with respect to any property, the 3d and the 10th taxable years beginning after the taxable year in which the property was placed in service, unless the actual income earned in connection with the property for the period before the close of such 3d or 10th taxable year is within 10 percent of the income earned in connection with the property for such period which was taken into account under paragraph (1)(A).
(5)
Special rules
(A)
Certain costs treated as separate property
For purposes of this subsection, the following costs shall be treated as separate properties:
(B)
Syndication income from television series
In the case of property which is 1 or more episodes in a television series, income from syndicating such series shall not be required to be taken into account under this subsection before the earlier of—
(C)
Special rules for financial exploitation of characters, etc.
For purposes of this subsection, in the case of television and motion picture films, the income from the property shall include income from the exploitation of characters, designs, scripts, scores, and other incidental income associated with such films, but only to the extent that such income is earned in connection with the ultimate use of such items by, or the ultimate sale of merchandise to, persons who are not related persons (within the meaning of section
267
(b)) to the taxpayer.
(E)
Treatment of distribution costs
For purposes of this subsection, the income with respect to any property shall be the taxpayer’s gross income from such property.
(F)
Determinations
For purposes of paragraph (2), determinations of the amount of income earned in connection with any property shall be made in the same manner as for purposes of applying the income forecast method; except that any income from the disposition of such property shall be taken into account.
(6)
Limitation on property for which income forecast method may be used
The depreciation deduction allowable under this section may be determined under the income forecast method or any similar method only with respect to—
(7)
Treatment of participations and residuals
(A)
In general
For purposes of determining the depreciation deduction allowable with respect to a property under this subsection, the taxpayer may include participations and residuals with respect to such property in the adjusted basis of such property for the taxable year in which the property is placed in service, but only to the extent that such participations and residuals relate to income estimated (for purposes of this subsection) to be earned in connection with the property before the close of the 10th taxable year referred to in paragraph (1)(A).
(B)
Participations and residuals
For purposes of this paragraph, the term “participations and residuals” means, with respect to any property, costs the amount of which by contract varies with the amount of income earned in connection with such property.
(C)
Special rules relating to recomputation years
If the adjusted basis of any property is determined under this paragraph, paragraph (4) shall be applied by substituting “for each taxable year in such period” for “for such period”.
(8)
Special rules for certain musical works and copyrights
(A)
In general
If an election is in effect under this paragraph for any taxable year, then, notwithstanding paragraph (1), any expense which—
(i)
is paid or incurred by the taxpayer in creating or acquiring any applicable musical property placed in service during the taxable year, and
shall be amortized ratably over the 5-year period beginning with the month in which the property was placed in service. The preceding sentence shall not apply to any expense which, without regard to this paragraph, would not be allowable as a deduction.
(B)
Exclusive method
Except as provided in this paragraph, no depreciation or amortization deduction shall be allowed with respect to any expense to which subparagraph (A) applies.
(C)
Applicable musical property
For purposes of this paragraph—
(i)
In general
The term “applicable musical property” means any musical composition (including any accompanying words), or any copyright with respect to a musical composition, which is property to which this subsection applies without regard to this paragraph.
(h)
Amortization of geological and geophysical expenditures
(1)
In general
Any geological and geophysical expenses paid or incurred in connection with the exploration for, or development of, oil or gas within the United States (as defined in section
638) shall be allowed as a deduction ratably over the 24-month period beginning on the date that such expense was paid or incurred.
(2)
Half-year convention
For purposes of paragraph (1), any payment paid or incurred during the taxable year shall be treated as paid or incurred on the mid-point of such taxable year.
(3)
Exclusive method
Except as provided in this subsection, no depreciation or amortization deduction shall be allowed with respect to such payments.
(4)
Treatment upon abandonment
If any property with respect to which geological and geophysical expenses are paid or incurred is retired or abandoned during the 24-month period described in paragraph (1), no deduction shall be allowed on account of such retirement or abandonment and the amortization deduction under this subsection shall continue with respect to such payment.
(5)
Special rule for major integrated oil companies
(A)
In general
In the case of a major integrated oil company, paragraphs (1) and (4) shall be applied by substituting “7-year” for “24 month”.
(B)
Major integrated oil company
For purposes of this paragraph, the term “major integrated oil company” means, with respect to any taxable year, a producer of crude oil—
(i)
which has an average daily worldwide production of crude oil of at least 500,000 barrels for the taxable year,
(ii)
which had gross receipts in excess of $1,000,000,000 for its last taxable year ending during calendar year 2005, and
(iii)
to which subsection (c) of section
613A does not apply by reason of paragraph (4) of section
613A
(d), determined—
(I)
by substituting “15 percent” for “5 percent” each place it occurs in paragraph (3) of section
613A
(d), and
(i)
Cross references
(1)
For additional rule applicable to depreciation of improvements in the case of mines, oil and gas wells, other natural deposits, and timber, see section
611.