FROM: Stanley J. Bowers, Tax Commissioner

DATE: April 8, 1958

RE: Computing True Value of Furniture, Fixtures and Equipment of Hotel, Retail. and Other Establishments.

For many years it has been common practice for persons engaged in hotel, retail and certain other businesses to maintain their records on an exhaustion method. 'This exhaustion method entails the write off of the cost and accumulated reserves for depreciation of furniture, fixtures and equipment at the time such

sets become fully depreciated. Of course, such a write-off does not necessarily coincide with the actual disposal of the assets and for this reason records so maintained do not lend themselves to a true value computation (302 method) as used by this Department for many years. The accuracy of the 302 method depends upon the availability of costs of all furniture and fixtures physically on hand and in use or held for use.

Experience indicates that some portion of the assets so written off as being fully depreciated are still on hand and in use or held for use. Recognizing that there is no absolute way short of a physical appraisal or an inventory to evaluate such fully depreciated assets still on hand and in use or held for use, this Department has adopted and is using presently, the method outlined in the sample computation affixed hereto.

In summary the method proposed provides that all fully depreciated write-offs be added back at cost by year of acquisition for all years including, a ten year period preceding the year in which the twenty per cent (20%) utility value is reached on the regular 302 method. It is assumed, with respect to such add backs, that an amount equal to ten per cent (100%) of the cost thereof win disappear each year commencing with the year preceding the oldest year of acquisition appearing on the regular 302 computation until a value of zero is reached.

It is to be noted and emphasized that this revised method is only to be used, and will only be followed, in instances where book records are maintained on an exhaustion system or where book records do not include all furniture, fixtures and equipment items still on hand and in use or held for use.

This revised method for determining the true value of items of furniture, fixtures and equipment, which have been written off the book records, but which are still on hand and in use or held for use, does not, under any circumstances, penalize a person recording disposals of assets. On the other hand, it does uniformly value assets which are still on hand but written off of the taxpayers books of records by reason of becoming fully depreciated.

EXHAUSTION METHOD (Bull. 124)

The exhaustion concept assumes that items of property which have aged to the "floor" of the 10% annual allowance are disposed of, thereafter, at a uniform rate of 10% per year.

Since a 10-year "life" is indicated by both the 10% annual allowance and the Class III percentages, the assumed disposal rate is continued in1980 and subsequent returns.

Comparison:

10% Annual Allowance                                                      Class III Percentages

Note: *Computation of assumed disposals under the cost-index method is not affected by the change to composite group-lives. The cost-index method relates only to costs and disposalS-not valuation percentages.

Department of Taxation of Ohio

EXAMPLE OF INITIAL TRUE VALUE COMPUTATION – HOTELS RETAIL ESTABLISHMENTS

DEPRECIATING BY EXHAUSTION METHOD - 10 PERCENT DEPRECIATION RATE

1957 Return

1. Total Add-back of fully depreciated and unrecorded disposal write-offs at original cost.
2. Total estimated disposals.
3. Estimated remaining cost of (A).
4. Sound Value of (C).
5. Add-back of fully depreciated items with less than a 10 year life.
6. Transfer in current year.
7. Recorded disposals – current year.