1. (a) Depreciation shall be determined by subtracting the salvage value from the purchase price and multiplying the difference by the number of years of useful life. Example of calculation:

   1. (1) Purchase price $100,000
   2. (2) Minus salvage value $10,000
   3. (3) Equals $90,000
   4. (4) Divided by useful life ÷ 10
   5. (5) Equals depreciation per year $9,000

2. (b) Return on investment shall be determined by adding the undepreciated balance at the beginning of the year with the undepreciated balance at the end of the year, dividing the sum by 2, subtracting the salvage value from the quotient, multiplying the difference by 6% to get the return on investment per year. Example of return on investment calculation:

   1. (1) Undepreciated balance at beginning of year $100,000
   2. (2) Add undepreciated balance at year end $91,000
   3. (3) $191,000
   4. (4) Divide by 2 ÷ 2
   5. (5) $95,500
   6. (6) Less salvage value $10,000
   7. (7) $85,500
   8. (8) Multiply by 6% rate $.06
   9. (9) Return on investment per year $5,130
3. (c) Ten years useful life and a depreciation rate of 10% per year are normally used. However, a different term can be used if the situation calls for it, based upon documentation in the taxpayer's records. Useful life must be the lesser of the expected life of the equipment, or the life of the field. Straight line depreciation is the preferred and recommended depreciation method. If another method is used, the taxpayer should be ready to support why that particular method is appropriate for the situation. If fully depreciated equipment continues in use by the taxpayer, they can continue to deduct the return on investment amount on the salvage value.

Added at 25 Ok Reg 2039, eff 7-1-08