Useful Life
The estimated period over which a depreciable asset is expected to provide economic benefits, used to calculate periodic depreciation expense.
What is Useful Life?
Useful life is the estimated number of years (or units of production) that a fixed asset is expected to serve the business before it is retired, sold, or becomes economically obsolete. It is a critical input in depreciation calculations: under straight-line depreciation, annual expense = (cost − salvage value) ÷ useful life. Useful life is an accounting estimate determined by management based on historical experience, manufacturer specifications, technological change expectations, and legal or regulatory limitations. IRS Publication 946 and the Modified Accelerated Cost Recovery System (MACRS) provide prescribed recovery periods that companies must use for tax depreciation (e.g., 5 years for computers, 7 years for office furniture, 39 years for nonresidential real property). GAAP useful lives may differ from IRS lives. When actual life differs from the estimate, companies revise depreciation prospectively — not retroactively — which affects future depreciation expense without restating prior periods.
Example
A hospital buys an MRI machine for $2 million with an estimated useful life of 10 years and a $200,000 salvage value. Annual straight-line depreciation = ($2,000,000 − $200,000) ÷ 10 = $180,000 per year. After 5 years, advancing technology makes the machine obsolete 2 years early. The hospital revises the remaining useful life to 3 more years (instead of 5), increasing annual depreciation to $300,000 for the remaining period.