How To Determine a Tangible Asset’s Useful Life?

What Is an Asset’s Useful Life?

A tangible asset is any asset in physical form. Tangible assets include fixed assets such as machinery, land, and buildings. Tangible assets can also be current assets, such as inventory. Factors involved in determining the useful life of a tangible asset include the age of the asset when purchased, how frequently the asset is used, and the environmental conditions of the business that purchased the asset.

Key Takeaways:

• Tangible assets include fixed and current assets.
• The useful life of an asset includes the age of the asset, frequency of use, and business environmental conditions.
• The IRS provides guidelines for estimating the useful lifespans of assets and the period over which depreciation of the asset may occur. 

The useful life of an asset is an estimation of the length of time the asset can reasonably be used to generate income and be of benefit to the company. Useful life does not refer to the length of time the asset will last. The useful life of identical assets varies by user, and that life depends on the asset’s age, frequency of use, condition of the business environment, and repair policy. Additional factors that affect an asset’s useful life include anticipated technological improvements, changes in laws, and economic changes.

Tangible Asset, Useful Life, and the IRS

The Internal Revenue Service (IRS) uses the useful life of an asset to estimate the period over which depreciation of the asset may occur. Because this estimate is based on facts that change over time, useful life can be adjusted to compensate for such changes if they are significant and if there is a definite reason for the adjustment.

Important

The IRS lists useful life estimates by asset and industry in IRS Publication 946, Appendix B.

How to Determine the Useful Life of an Asset

Numerous factors affect an asset’s useful lifespan, including working conditions, usage, manufactured materials, and maintenance performed. You can use one or several of these factors when calculating an asset’s useful life.

Manufacturer Specifications

Some manufacturers may supply data telling users how long a specific asset may last. This timeframe may vary depending on the asset, such as cycles, hours of operation, or times used.

Manufacturer specifications often include details about the materials used to construct the asset, as well as estimates about how usage intensity may affect depreciation over an asset’s lifespan. Material quality and usage estimates are important variables that you should consider when calculating an asset’s useful life.

Historical Data

Oftentimes, tangible assets are bought secondhand in private transactions or over the counter. This can make it difficult to determine an asset’s usage history unless the previous owner kept meticulous records (and shared this information with the new owner).

When available, historical data can prove extremely helpful for determining an asset’s useful life. For example, services like Carfax provide vehicle history information to individuals and businesses. This information can include a vehicle’s accident and maintenance history as well as market valuation data that make it easier to estimate a used vehicle’s remaining useful life.

Consult an Expert

In some cases, you may need to consult an expert or skilled mechanic to appraise an asset to determine its remaining useful life. Experts often have the specialized knowledge to consider all the variables that affect an asset’s life, like maintenance history, environmental conditions, and other factors. This insight is especially useful when handling high-value or specialized assets that use unique depreciation methods.

Real Life Examples

The IRS has developed a list of standard useful lifespans for nearly every tangible asset that a company may acquire for use in its business.

Assets the IRS estimates to have a useful lifespan of three years include horses that are two years or older, tractors, and tractor units. Assets with an estimated useful lifespan of five years include cars, taxis, buses, trucks, computers, office machines (including fax machines, copiers, and calculators), equipment used for research, and cattle.

Assets with an estimated useful lifespan of seven years include office furniture and fixtures. Assets with an estimated useful lifespan of 10 years include single-purpose agricultural or horticultural structures, fruit or nut-bearing vines and trees, and equipment used for water transportation.

Assets that have an estimated useful lifespan of 15 years include improvements to land or business property, such as shrubbery, roads, bridges, and fences. Assets that have an estimated useful lifespan of 20 years include farm buildings that are neither horticultural nor agricultural structures.

Assets with an estimated useful lifespan of 25 years include properties used for residential rental. Assets with an estimated useful lifespan of 39 years include non-residential real estate, such as a home office minus the value of the land.

The estimated lifespans determined by the IRS do not necessarily reflect the length of time any specific asset will last. These time periods merely reflect the general length of time that the assets are likely to be of some benefit or use to the company. They are subject to adjustment in relation to any of the factors mentioned above that may affect an asset’s useful lifespan.

What’s the Difference Between a Tangible and Intangible Asset?

Tangible assets are physical assets, which means they can be touched. In contrast, intangible assets don’t have a physical form, making them purely conceptual. For example, a computer is a tangible asset, while a patent is an intangible asset.

How Can You Value Tangible Assets?

There are three primary ways to value a tangible asset: liquidation price, replacement cost, and specific appraisal.

• The liquidation price method considers the price an asset will fetch on the open market.
• The replacement cost method calculates the cost of replacing an asset.
• The specific appraisal method seeks the advice of an experienced appraiser to calculate an asset’s value.

What Are Some Methods for Depreciating Tangible Assets?

Common methods used by accountants for depreciating assets include: straight line, declining balance, double-declining balance, sum-of-the-years’ digits, and unit of production. The straight line method is the most straightforward, while the others are accelerated or more complex depreciation methods used for specific assets or situations.

The Bottom Line

Tangible assets have a useful life, which is the estimated timeframe within which they can feasibly generate income and provide value for a company. Various factors affect an asset’s useful life, including material quality and durability, usage intensity, environmental conditions, and maintenance history. The IRS uses an asset’s useful life when determining how long an asset may be depreciated.