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APPENDIX E
Depreciation of Capital Expenses
Considerations Regarding Depreciation
Overview
Depreciation and use allowances typically are the methods used to allocate the cost of fixed
assets to activities conducted by the organization during its fiscal year. They usually are com-
puted on the original acquisition cost of the asset and the period of useful service (useful life)
established in each case for usable capital assets. Federal Transit Administration (FTA) and state
Departments of Transportation typically specify the useful life for all capital assets used in tran-
sit service.
TCRP Report 144: Sharing the Costs of Human Services Transportation is designed to facilitate cost
sharing agreements between public transit and human service agencies. In the majority of cases,
transit agencies likely will receive capital assistance through one or more of the many programs
administered by the FTA (i.e., Sections 5307, 5309, 5310, 5311, 5316, or 5317). Additionally, it is
likely that when human service agencies purchase service from another organization, they may use,
in part, revenues derived from federal grants that support client transportation. This scenario is
common in coordinated transportation where cost sharing agreements are necessary.
The Office of Management and Budget (OMB) is the agency of the federal government
responsible for assisting the President in overseeing the preparation of the federal budget and
supervising its administration in Executive Branch agencies. OMB promulgates rules on the
allowability of expenditures under various federal grant awards. Both OMB Circulars A-87 and
A-122 specifically exclude the cost of depreciation as an allowable expense under federal
awards. Language in both circulars is identical, reading as follows:
· The computation of depreciation or use allowances will exclude:
The cost of land;
Any portion of the cost of buildings and equipment borne by or donated by the federal gov-
ernment irrespective of where the title was originally vested or where it presently resides; and
Any portion of the cost of buildings and equipment contributed by or for the governmental
unit, or a related donor organization, in satisfaction of a matching requirement.
Implications for this Effort
The Cost Sharing Model provides, at the user's discretion, the opportunity to include depreci-
ation in the computation of fully allocated costs. In most cases, however, it is recommended that
the user should not include depreciation in the model's computations for the reasons described
in Chapter 11 of this report (see Volume 2, "Research Report"). In communities where the vast
majority of the users of the Cost Sharing Model are using federal funds for capital purposes and
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Depreciation of Capital Expenses 71
everyone excludes capital costs, the Cost Sharing Model still will provide appropriate guidance
for allocating costs among stakeholders.
An Example of Depreciation
A local senior center may require transportation of older adults to participate in the daily
activities of the center. The center receives funding from the Area Agency on Aging (AAA) under
the Older Americans Act (42 U.S.C. § 3030d [a] [2]). The center then seeks to enter into an agree-
ment with the local community transportation agency to provide this service. The local trans-
portation organization may have acquired its vehicles under one of the previously listed FTA
grant programs; typically, the federal government will pay for 80 percent of the cost of the vehi-
cle. In this example, it would not be permissible for the senior center to pay depreciation or use
charges to the transportation agency for the part of the cost of equipment paid for by the federal
government. This would be an unallowable expense.
This commonly occurring situation is the typical arrangement in coordinated transportation
agreements. In this situation, when an organization is attempting to develop a cost sharing agree-
ment with another organization, depreciation should be excluded from the analysis so as to not
violate OMB cost allowability standards.
Alternative Considerations
It is permissible for a transit organization to include that portion of an asset not paid for
by the federal government in a use or depreciation charge. For example, the North Carolina
Department of Transportation (NCDOT), in its cost sharing procedures, permits its grantees to
include the non-federal share of capital equipment (as an option component) in cost sharing
agreements with human service agencies. However, this introduces a fair amount of complexity
into the Cost Sharing Model because each and every asset should be documented in terms of the
original acquisition cost, useful life, and cost sharing arrangements at the time of purchase. This
level of documentation can create additional accounting burdens for the organization.
There are situations where inclusion of capital equipment is recommended in the Cost
Sharing Model. These situations typically include scenarios where a transit agency enters into a
service agreement with a private sector transportation provider (in which there would be no fed-
eral participation in the provider's rolling stock and facilities) and depreciation would be rea-
sonably a component of contract costs. In this circumstance, users of the Cost Sharing Model
should include depreciation in the computations.
