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thepropertywasplacedinservice(mid-quarterconvention). Themid-quarterconventionisonlyallowed if more than 40% of the value of dl assets placed in service during the year were done so during the last quarter of the year. The IRS has similar rules for the year in which a property is taken out of service before klly depreciated. If an analysis requires more accuracy or detail than what is provided in this manual, the IRS rules should be examined more c~osdy. In addition to the depreciation method, the depreciationperiod for the related technology or property must be determined. The IRS provides guidelines or recommended recovery periods for many different types of properties (see IRS Publication 534 [IRS 1993]), Examples of recommended recovery periods using GDS methods include: Alternative energy property (nonutility generators) - 5 years Alternative energy property (public utility generators) - 7 years Nuclear production plant - 15 years Nuclear fuel assemblies - 5 years Hydro production plant - 20 years Steam production plant - 20 years Combustion turbine production plant - 15 years Transmission and distribution plant - 20 years Nonresidential red property - 31.5 years. Recommended recovery periods using ADS methods include: Alternative energy property (nonutility generators) - 12 years Nuclear production plant - 20 years Nuclear fuel assemblies - 5 years Hydro production plant - 50 years Steam production plant - 28 years Combustion turbine production plant - 20 years Transmission and distribution plant - 20 years Nonresidential real property - 40 years. The class life of property is determined by referring to Appendix B of IRS Publication 534 (IRS 1993). If an item is not described in the publication, such item should be depreciated using a 7-year recovery periodunderGDS,ora12-yearrecoveryperiodunderADS. Also,notethataparticularprojectcanhave equipmentwithdifferentdepreciationschedules(suchasinthecaseofthenuclearproject). Ifthereare any questions regarding the appropriate class life of an investment or a component of that investment, the IRS should be contacted. Table2-7illustratesthe200%DBdepreciationmethod. Thisexampleassumesanon-red-estatecapital asset is purchased that has a 7-year life and a book value of $10,000, with no salvage value. The asset is depreciated at the 200% DB rate until the annual depreciation values using DB versus SL crossover in year five. At that time, the depreciation method switches from the DB method to the SL method and the remaining value of the asset is depreciated at the flat rate of $867.69 per year. The last column in the table calculates the present value of accumulated depreciation (PVDEP), assuming an investor nominal discount rate of 12%. After 7 years, the present value is only $7,202. The difference between the $10,000 original investment and the present value of depreciation ($7,202) represents that portion of the investment that is, in effect, unavailable to the investor as a tax deduction because of the time value of money. Shorterdepreciationperiodsarethuspreferredbymostinvestors. Clearly, there are noticeable tax benefits for using DB depreciation rather than SL depreciation. For example, suppose a machine is purchased for $100,000 and has no expected salvage value and is to be 21PDF Image | A Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies
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