The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method used for U.S. federal income tax purposes. MACRS applies to most business assets placed into service after 1986.
MACRS consists of two systems:
- General Depreciation System (GDS)
- Alternative Depreciation System (ADS)
In most cases, taxpayers use GDS unless specifically required to use ADS, or the taxpayer elects to use ADS instead of GDS. The decision to make the election will depend upon the circumstances.
Alternative Depreciation System (ADS) Basics
The primary differences between GDS and ADS are the recovery periods and available depreciation methods. ADS requires using the straight-line depreciation method, while GDS allows the straight-line and declining balance methods.
A company must use ADS for the following types of property:
- Nonresidential real property, residential real property, and qualified improvement property held by an electing real property trade or business.
- Any property with a recovery period of 10 years or more under GDS held by an electing farming business.
- Any tax-exempt use property.
- Any tax-exempt bond-financed property.
- All property used predominantly in a farming business and placed in service in any tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect.
- Any property imported from a foreign country for which an Executive order is in effect because the country maintains trade restrictions or engages in other discriminatory acts.
- Any tangible property used predominantly outside the United States during the tax year.
- Any listed property used 50% or less in a qualified business use during the tax year.
Example of ADS Calculation for Real Estate
Company ABC LLC, a Delaware limited liability company (LLC), owns a residential rental property in Belize City, Belize. The residential real estate is tangible property used predominantly outside of the United States; therefore, the company must depreciate the asset using the straight-line method under ADS. They cannot use GDS.
Under ADS, the recovery period for residential rental property is 30 years. In contrast, residential rental property based in the U.S. and eligible for GDS uses a recovery period of 27.5 years. Although the difference between ADS and GDS is relatively minor, there is a difference nonetheless.
More Information
Taxpayers can reference IRS Publication 946 (How to Depreciate Property) for more information on ADS.