Alternative Depreciation System

There is an alternative MACRS depreciation system (known as ADS), under which depreciation is deducted over generally longer periods than under regular MACRS, using the straight-line method.

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.

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.

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.

Planning Tools You can print these commonly used depreciation tables to aid in your financial planning.

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.