Internal Control of Fixed Assets: A Controller and Auditor's Guide

CHAPTER FOURTEEN 14

Component Depreciation for Buildings^a

IN THE UNITED STATES when a company buys a building, say an office, warehouse, or factory the total cost is capitalized. That dollar amount (other than the value of the underlying land) is then depreciated over the useful life assumed for the building.

For federal income tax purposes, most buildings are assigned a 39-year life; accountants by and large use that same 39-year time period for book depreciation as well as taxes. If nothing else, this use of the same life for books and taxes effectively eliminates any deferred tax accounting. Further, using a 39-year life seemingly accords with economics; many buildings may face a degree of functional depreciation or economic obsolescence within that time period.

While there are many buildings in use today that were constructed before 1972, this fact alone does not call into question the use of a 39-year life. The reason is that there is an active market in all types of buildings and there is a high probability that within the first 39 years the original owner will sell to a third party. Under any type of accounting the new owner of an existing building would start depreciating it based on the cost to the new owner and the expected life to that new owner. Perhaps for simplicity, or from habit, second owners usually also assign their own 39-year life.

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