Sum-of-the-Years'-Digits Method (SOYD)
method of
accelerated depreciation
that results in higher
depreciation
charges and greater tax savings in the earlier years of a
fixed asset
useful life than the
straight-line depreciation
method, where charges are uniform throughout. Sometimes called just sum-of-digits method, it allows depreciation based on an inverted scale of the total of digits for the years of useful life. Thus, for four years of life, the digits 4, 3, 2, and 1 are added to produce 10. The first year's rate becomes 4/10ths of the depreciable cost of the asset (cost less salvage value), the second year's rate 3/10ths, and so on. The effects of this method of accelerated depreciation are compared with the straight-line method in the following illustration, which assumes an asset with a total cost of $1000, a useful life of four years, and no salvage value:
| YEAR |
STRAIGHT LINE |
|
SUM-OF-YEARS'DIGITS |
|
|
Expense |
Cumulative |
Expense |
Cumulative |
| 1 |
$250 |
$250 |
$400 |
$400 |
| 2 |
$250 |
$500 |
$300 |
$700 |
| 3 |
$250 |
$750 |
$200 |
$900 |
| 4 |
$250 |
$1000 |
$100 |
$1000 |
|
$1000 |
|
$1000 |
|
See also
Modified Accelerated Cost Recovery System (MACRS)
provision, originally called the Accelerated Cost Recovery System (ACRS), instituted by the Economic Recovery Tax Act of 1981 (ERTA) and modified by the Tax Reform Act of 1986, which establishes rules for the depreciation (the recovery of cost through tax deductions) of qualifying assets. With certain exceptions, the 1986 Act modifications, which generally provide for greater acceleration over longer periods of time than ERTA rules, are effective for property placed in service after 1986.
Under the modified rules, depreciable assets other than buildings fall within a 3-, 5-, 7-, 10-, 15-, or 20-year class life. The 3-, 5-, 7-, and 10-year classes use the Double Declining Balance depreciation method, with a switch to straight line depreciation. Instead of the 200% rate, you may elect a 150% rate. For 15- and 20-year property, the 150% declining balance method is used with a switch to straight line. The conversion to straight line occurs when larger annual deductions may be claimed over the remaining life. Real estate uses the straight line basis. Residential rental property placed in service after December 31, 1986, is depreciated over 27.5 years, while nonresidential property placed in service between December 1, 1986, and May 13, 1993, is depreciated over 31.5 years. A 39-year period applies to nonresidential property placed in service after May 12, 1993, although certain transition rules apply.
