Depreciation Allowance for Federal Income Taxes

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One of the most important as well as vexatious questions confronting accounting officers of water companies today is that of depreciation. This question has always been of paramount importance from the standpoint of invested capital, earnings and rates, but only recently, because of the activities of the Treasury Department, has it become of importance from a standpoint of taxation. The old haphazard manner of calculating a flat rate of four or five per centum on a mixed aggregate of unclassified assets will no longer be permitted for use as a deduction from income for tax purposes. The taxpayer must now be able to show the kind of property, date of acquisition, its estimated life, the depreciation taken in previous years and the amount of reserves for depreciation against the assets on which depreciation is claimed. Moreover, the depreciation claimed in the tax return, as well as the reserves therefor, should be set up on the general books of account or subsidiary records in sufficient detail to enable the department to verify the correctness of the amount of depreciation claimed. Now just what is depreciation? Depreciation is that loss of value whether tangible or intangible in form, resulting from physical decay, obsolescence and inadequacy. It necessitates repairs, renewals and replacements and were it not for depreciation, expenditures of every character relating to plant property would add to the investment in such property. Because depreciation results from so many diverse causes it has given rise to the belief that it cannot be scientifically provided for and one frequently hears the remark that since all estimates of depreciation are merely guesswork, one person's guess is as good as another's.