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.

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.

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.