Depreciation for tax purposes: a guide to the auditor;

              DEPRECIATION FOR TAX PURPOSES
A GUIDE TO THE AUDITOR
R. A . I s o la
New York
WITH THE passage of the 1954 Revenue Act and the promulgation
of the regulations of the Internal Revenue Service, it has
become increasingly important for the auditor to familiarize himself
not only with the general principles contained therein but also
with the application of the rules to specific situations which will
occur in connection with the preparation of the
tax return for the client. The statute and appli-cable
rules which permit a deduction for depre-ciation
go far beyond the question of deciding
whether or not straight-line or accelerated depre-ciation
should be used. Many specific problems
will arise, the proper treatment of which will
affect taxable income.
ACCOUNTING FOR DEPRECIABLE
PROPERTY
The auditor will first encounter the problem
of asset classification. Aside from separate classification of each
individual asset, referred to as item accounts, there are three prin-cipal
methods of asset classification, all of which are acceptable to
the Internal Revenue Service:
1. Group accounts. These may be described as groups of assets
which are similar in kind and have approximately the same life:
for example, a group of linotype machines.
2. Classified accounts. These are assets segregrated according to
use without regard to useful life. For example: machinery and
equipment, furniture and fixtures, or delivery equipment.
3. Composite accounts. This is a broader grouping where assets
are included in the same account regardless of their character or
useful life. For example, all the assets in a particular location may
be included in a single account.
The choice of a method of accounting for depreciable property
can have a considerable effect on the depreciation deduction and
on the extent to which retirement losses are recognized. For example,
a retirement loss is generally not allowable upon the normal retire-
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