Let’s assume that a commercial printing company has a small fire. As a result of the fire, the undamaged commercial printing press sits idle for one month during the restoration period. The printing press originally cost $200,000 and the historical monthly depreciation is $2381 based on the fact that the IRS considers the printing press to be an asset that should be depreciated over a seven year period. The business also uses this value as the monthly depreciation amount on financial statements such as a profit and loss statement.
Let’s also assume that the true useful economic life of an asset such as a printing press is 20 years. Using the ‘true economic life,’ the monthly depreciation value should be $833.
Therefore, when the adjuster wants to deduct depreciation of the press as a “saved expense” under the theory that the economic life of the asset has been extended, then the correct value to deduct is $833 which is based on the true economic life of the press. Alternatively, the historical financial statements could possibly be restated, using the actual estimated life of the assets rather than the tax life, and thereby increasing the amount of monthly net income to be used in the business interruption calculation.
Hey, I get it: This kinda stuff can make your eyes start to cross. The main point is that if a business needs to deduct depreciation as a “saved expense,” they should always perform a thorough review of the basis for the depreciation methods of the affected assets. And if your eyes do start to cross trying to figure this stuff out, don’t forget to call in your forensic accountant.
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