Cost recovery, amortization, and depletion are presented in Chapter 8. For most
fixed assets (e.g., machinery, equipment, furniture, fixtures, buildings) placed in
service after December 31, 1980, the Economic Recovery Tax Act of 1981 (ERTA)
has replaced the depreciation system with the cost recovery system.
relationship between the depreciation system and the cost recovery system is sum-
marized in Exhibit G.1.
Despite ERTA, a discussion of § 167 depreciation is still relevant for two reasons.
First, assets that were placed in service prior to 1981 are still in use. Second, certain
assets placed in service after 1980 are not eligible to use the cost recovery system
(ACRS and MACRS) and therefore must be depreciated. They include property
placed in service after 1980 whose life is not based on years (e.g., units-of-production
Section 167 permits a depreciation deduction in the form of a reasonable allowance
for the exhaustion, wear and tear, and obsolescence of business property and prop-
erty held for the production of income (e.g., rental property held by an investor).
Obsolescence refers to normal technological change due to reasonably foreseeable
Depreciation and Cost Recovery: Relevant Time Periods
Date Property Is Placed in Service
§ 167 depreciation
Before January 1, 1981, and
placed in service after December 31, 1980.
Original accelerated cost recovery
After December 31, 1980, and before January
Modified accelerated cost recovery
After December 31, 1986.
Depreciation is covered in § 167, and cost recovery
(ACRS and MACRS) is covered in § 168.
§ 167(a) and Reg. § 1.167(a)–1.