The General Depreciation System is the most commonly used Modified Accelerated Cost Recovery System (MACRS) for calculating depreciation. This system utilizes the declining balance method to depreciate personal property effectively.
Key Takeaways
- A general depreciation system employs the declining-balance method to depreciate personal property.
- The declining-balance method applies the depreciation rate against the non-depreciated balance.
- For tax purposes, the MACRS is the primary method of depreciation and uses either the declining balance method or the straight-line method.
Understanding the General Depreciation System (GDS)
The declining-balance method involves applying the depreciation rate against the remaining non-depreciated balance of the asset. For example, if an asset costing $1,000 is depreciated at 25% each year, the deduction is $250 in the first year, $187.50 in the second year, and so on.
The MACRS is the primary method allowed in the United States for calculating depreciation deductions for federal income tax purposes. The system allows for larger depreciation deductions in the early years and lower deductions in the later years of ownership. Depreciation is calculated using either the declining balance method or the straight-line method.
Depreciation and Taxes
Under MACRS, taxpayers must compute tax deductions for the depreciation of tangible property using specified asset lives and methods. Assets are categorized into classes by type or by the business context in which they are used. There are two subsystems of MACRS: the general depreciation system (GDS) and the alternative depreciation system (ADS). GDS is the most widely used and applicable to most assets.
The Alternative Depreciation System (ADS)
Each depreciation system varies in the number of years over which an asset can be depreciated. Typically, the GDS uses shorter recovery periods than the ADS. The ADS sets depreciation as an equal amount each year, except for the first and last year, which might not be full 12 months. This results in lower annual depreciation costs as more years are spread over depreciation. However, some assets have the same recovery period irrespective of the system used, such as cars, some trucks, and computers, which are depreciated over five years.
Under rules, if the ADS system is selected for a given asset class, it must be used for all assets in that class, and the GDS cannot be used subsequently.
IRS asset classes under GDS and ADS systems assign class lives based on varying asset life estimates. For instance, office furniture, fixtures, and equipment have a class life of ten years using the ADS method and seven years using the GDS method. A natural gas production plant has a 14-year class life under ADS and seven years under GDS.
Accelerated depreciation approaches and the choice between GDS or ADS systems can significantly impact reported financial results.
Related Terms: Modified Accelerated Cost Recovery System, Straight-Line Method, Alternate Depreciation System.
