Related topics

Remaining Value Over Remaining Life Methods

Remaining Value Over Remaining Life Conventions

Remaining Value Over Remaining Life Calculation

Remaining Value Over Remaining Life Example

Remaining Value Over Remaining Life Short-Year Calculation

RH and RM Methods Overview

RH and RM are Remaining Value over Remaining Life (RV/RL) methods, which spread the remaining value of the asset over its remaining life as of the asset’s beginning date, if it exists. Otherwise, straight-line depreciation is calculated from the asset’s placed-in-service date in accordance with the method’s averaging convention.

As with the RV method, RH and RM are useful when changing an asset’s acquired value, depreciation method or estimated life in a period after the asset’s place-in-service period and before the asset is fully depreciated. The RV/RL methods are used when you want to retain the existing accumulated depreciation of an asset as of a specific period end date and evenly spread the remaining value over the remaining life.

A tax provision from the Tax Cuts and Jobs Act of 2017 necessitated the addition of these two depreciation methods for property to depreciate properly after switching to a longer life under the ADS rules.

When a real property trade or business elects out of interest deduction limits under Section 163(j), they must use the MACRS alternative depreciation system (ADS) to depreciate any non-residential real property, residential rental property or qualified improvement property held. This includes existing properties – as of the fiscal year the election is made. Similar rules apply to farming businesses and property with a 10-year or greater life.

The IRS Change in Use rules require the same averaging convention be applied before and after the change. Such property uses either a midmonth, half-year, or midquarter convention.

This provision, Section 163(j) of the Internal Revenue tax code, is effective for tax years beginning after December 31, 2017.

Averaging Conventions

RH and RM each use a different averaging convention, as indicated in their name.

Remaining Value Over Remaining Life, half-year (Method RH)

Remaining Value Over Remaining Life, midmonth (Method RM)

Since RH allows for a half-year convention, the midquarter convention, when applicable, can be applied. The MACRS Convention Switch can be used to switch an asset or assets with the depreciation method RH to the midquarter convention from the half-year convention or back to the half-year convention from the midquarter convention. See Midquarter Averaging Convention: When and How to Apply It.

Method RM is not eligible for the midquarter convention.

See Remaining Value Over Remaining Life Methods and Remaining Value Over Remaining Life Conventions for more details.

Tax Depreciation Considerations

Timing of the change

Use methods RM or RH to when changing an asset’s method or other critical depreciation field as of the beginning of a tax year after the asset’s place in service year. If a critical field change is needed during the PIS year (before the tax return is filed, or amended), it is recommended to change to the correct critical values as of the place in service date.

Form 4562 Considerations

RH and RM are considered ADS (Alternative Depreciation System) methods for purposes of classification on IRS Form 4562.

Including the RH and RM methods, there are four ADS straight-line methods available – AD, AA, RH & RM.

Salvage Value Considerations

Methods RH and RM subtract any Salvage Value from the asset’s Depreciable Basis. IRS rules state to disregard any salvage value, thus salvage value should not be entered in tax books using RH or RM.