What Is Useful Life?

The useful life of an asset is an accounting estimate of the number of years it is

likely to remain in service for the purpose of cost-effective revenue generation.
The Internal Revenue Service (IRS) employs useful life estimates to determine
the amount of time during which an asset can be depreciated. There are a variety
of factors that can affect useful life estimates, including usage patterns, the age
of the asset at the time of purchase and technological advances.

Understanding Useful Life

Useful life refers to the estimated duration of utility placed on a variety of
business assets, including buildings, machinery, equipment, vehicles,
electronics, and furniture. Useful life estimations terminate at the point when
assets are expected to become obsolete, require major repairs, or cease to
deliver economical results. The estimation of the useful life of each asset, which
is measured in years, can serve as a reference for depreciation schedules used
to write off expenses related to the purchase of capital goods.

Useful Life and Straight Line Depreciation

The depreciation of assets using the straight-line model divides the cost of an
asset by the number of years in its estimated life calculation to determine a
yearly depreciation value. The value is depreciated in equal amounts over the
course of the estimated useful life. For example, the depreciation of an asset
purchased for $1 million with an estimated useful life of 10 years is $100,000 per
year.

Useful Life and Accelerated Depreciation

Businesses may also elect to take higher depreciation levels at the beginning of
the useful life period, with declining depreciation values over the duration of the
time span using an accelerated model. The yearly write-offs in the reducing
balance depreciation model decline by a set percentage rate to zero. Using the
sum of the years method, depreciation declines by a set dollar amount each year
throughout the useful life period.

Useful Life Adjustments

The duration of utility in a useful life estimate can be changed under a variety of
conditions, including early obsolescence of an asset due to technological
advances in similar applications. To change a useful life estimate in this
circumstance, the company must provide a clear explanation to the IRS, backed
by documentation comparing the old and new technologies. For example, if a
company's original useful life estimate is 10 years, but new technology is likely to
render it obsolete after eight years, the company may be able to accelerate
depreciation based on a shorter schedule. In this situation, a company that is
depreciating assets based on a 10-year schedule may be able to increase yearly
depreciation values based on a newly abbreviated eight-year useful life estimate.