Alternative Depreciation System
There is an alternative MACRS depreciation system (known as
ADS), under which depreciation is deducted using the straight-line
method over generally longer periods than under regular
MACRS..
The ADS straight-line method must be used in certain
situations when normal MACRS is not available. This is the case,for
example, if you've used the standard mileage
rate method of deducting vehicle expenses and want to switch to
the actual cost method in a later year. ADS must also be used if
your business use of listed property drops
to 50 percent or less for a year.
For property purchased in
1998 or earlier, the ADS system must be used to compute your alternative minimum tax (AMT) liability,
if you're unlucky enough to have to worry about the AMT. Taxpayers
who have paid or are likely to pay AMT will need to maintain depreciation
records under both the alternative system and the regular MACRS.
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Save Time Things are currently a little simpler.
For depreciable real estate placed into service in 1999 or
later, you will be able to use the same depreciation allowable under normal MACRS even if you are subject to
the AMT, so you no longer have to maintain two sets of records. For
non-real estate property purchased in 1999 or later, you may use the
MACRS recovery periods for AMT purposes but must use a slower recovery method;
namely, either the straight-line or the 150 percent declining balance
method, rather than the 200 percent declining balance method. |
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You can elect to use the slower ADS depreciation even
if you are not required to use it by law; for example, if you want
your earnings to appear larger on your income statement, you might
opt to use ADS for any new property you purchase because it will result
in lower depreciation deductions.
However, if you begin depreciating
a particular asset using ADS, you must continue using it for the life
of the asset you can never switch back to the ordinary MACRS
system. Also, if you elect this method for one item in an asset class, you must use it for all assets
of that class that you placed into service that year, unless the asset
is real estate.
For more information on how to use ADS and
for the tables showing the applicable depreciation percentages, see
the IRS's free publication 946, How to Depreciate Property, available
on the Internet at the IRS
web site or by calling 1-800-TAX-FORM.
Intangible property. Generally, most intangible
property is not depreciable; rather you amortize the cost over a number
of years. However, you can depreciate patents, copyrights, and "off-the-shelf"
computer software. If you can depreciate intangible property, you
usually use the straight-line method of depreciation. The deductible
amount under the straight-line method is determined by subtracting
the salvage value from the depreciation basis of the property and
dividing it by the estimated useful life of the property. The resulting
amount is your annual depreciation deduction. In addition, you can
choose to depreciate certain movies, books, sound records, copyrights
and patents under the income-forecast method. If you have this type
of property, you should consult IRS Publication 946, How To Depreciate
Property, to learn more about your options.
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