Depreciation is allowable under Government contracts, subject to a few limitations.
Contractors subject to Cost Accounting Standards (CAS), must, of course, follow CAS 409, Depreciation of Tangible Capital Assets. They may also elect to apply CAS 409 to non-CAS covered contracts
For contracts to which CAS 409 does not apply, allowable depreciation cannot exceed the amount used for financial accounting purposes and must be determined in a manner consistent with the depreciation policies and procedures followed in the same segment on non-Government business. This means that it is unlikely that the accelerated depreciation methods used for tax purposes (e.g. ACRS/MACRS) can be used.
Residual values must be taken into account unless those residual values are less than 10 percent of the capitalized cost of the asset or where declining balance or class life asset depreciation is used.
Contractors cannot depreciate assets acquired from the Government at no cost by it or by any division, subsidiary, or affiliate under common control.
Contractors cannot depreciate property that is already fully depreciated by it or any division, subsidiary, or organization under common control. However, a reasonable use charge for fully depreciated property may be agreed upon and allowed. Contractors will need an advance agreement if they want to do this.
Contractors cannot call their assets "impaired" and write them off immediately. Depreciation on impaired assets cannot exceed that which would have been allowable had the assets not been impaired.
Depreciation on sales and lease-backs cannot exceed that which would have been allowable had the contractor retained title.
Depreciation is one of those "pay me now, pay me later" type transactions. Contractors will eventually recover their investment. There is incentive to accelerate depreciation by selecting an accelerated depreciation method or tinkering around with useful lives but eventually, contractors will recover their investments in property, plant and equipment. The promulgation of CAS 414 and FAR 31.205-10, Facilities Capital Cost of Money, where contractors can claim imputed interest on their undepreciated asset investments, has rendered arguments over depreciation methods almost moot.