tax liability substantially. Second, the selection 

 of the method of depreciation for property can 

 affect tax Uabihty not only in the current year 

 but also in future years (e.g., accelerated meth- 

 ods reduce tax UabiUty in early years of owner- 

 ship and increase liability in later years as 

 compared with straight line methods). It should 

 be noted that depreciation calculations may 

 have little actual relation to the depreciation 

 costs that relate to wear, aging, and obsoles- 

 cence of the assets of a particular business. For 

 example, a single purpose farm building with 

 integrally installed equipment can become obso- 

 lete or worn out in less than the 10-year recovery 

 period for the IRS General Depreciation System 

 (GDS) regulation. On the other hand, the GDS 

 time period for most farm machinery is seven 

 years. Yet for practical purposes, a fully depre- 

 ciated tractor (one with a "book value" of zero) 

 may retain its essential usefulness for two or 

 more decades and, therefore, still have real 

 value as an asset. 



What this means is that depreciation values 

 can overstate or understate the actual asset 

 value. When assets last longer than the recov- 

 ery period, the result is an income statement 

 which understates actual net farm income and 

 overstates production costs. In situations, how- 



ever, where rapid technological innovation 

 causes assets to become obsolete more quickly 

 than the guideline recovery period, the result is 

 an overstatement of net incomes and an under- 

 statement of true costs. It often is argued that, 

 since the business typically has a set of different 

 types of assets acquired at different times, these 

 under- and over-statements "wash". That is, 

 they tend to balance out and approximate the 

 real value for the entire set of assets. 



There also are imphcations for the net worth 

 statement for the business. Assets may be 

 valued according to market value or cost value. 

 Using cost valuation one would use the "book 

 value" or depreciated value for the asset. Very 

 often the market value of the asset is greater 

 than the book value, especially when acceler- 

 ated depreciation methods have been used. As 

 a result, net worth may be understated and the 

 solvency position of the business will be lower 

 than is actually the case. This, in turn, may 

 have a negative impact on the ability of the 

 owner to obtain needed credit for the business. 

 For this reason, when seekingadditional credit, 

 the potential borrower might find it more ad- 

 vantageous to present the lender with a net 

 worth statement with assets stated in market 

 value terms. 



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Fruit Notes, Summer, 1994 



