What Is the General Depreciation System?
I'm here to explain the General Depreciation System, or GDS, which is the most commonly used part of the Modified Accelerated Cost Recovery System (MACRS) for figuring out depreciation. You should know that GDS applies the declining balance method specifically to personal property.
Key Takeaways
Let me lay this out directly: GDS relies on the declining balance method for depreciating personal property. This method means you apply the depreciation rate to whatever balance hasn't been depreciated yet. For your taxes, MACRS is the go-to depreciation approach, and it uses either the declining balance or straight-line method.
Understanding the General Depreciation System (GDS)
With the declining balance method, you take the depreciation rate and apply it to the remaining non-depreciated balance. Take an asset costing $1,000 depreciated at 25% yearly: your first-year deduction is $250, then $187.50 in the second year, and it continues like that.
MACRS itself is the main way to handle depreciation for federal income taxes in the U.S., letting you claim bigger deductions early in ownership and smaller ones later. Under MACRS, you calculate those deductions using either the declining balance method or the straight-line method.
Depreciation and Taxes
When you're dealing with MACRS, you have to compute tax deductions for tangible property depreciation based on set asset lives and methods. Assets get grouped into classes by type or by the business they're used in. MACRS has two subsystems: GDS and the Alternate Depreciation System (ADS). GDS is what you'll use for most assets, and it's the one that matters most here.
The Alternate Depreciation System (ADS)
Each system has different years for depreciating assets, and GDS usually has shorter recovery periods than ADS. With ADS, depreciation is an equal amount every year, except possibly for partial first and last years. This spreads out the cost over more years, lowering your annual depreciation expense. But some assets, like cars, certain trucks, and computers, have the same five-year period no matter which system you pick.
You have to apply ADS to all assets in a given class if you choose it, and once you do, you can't switch back to GDS later for those assets.
The IRS assigns class lives differently under GDS and ADS based on estimated asset life. For instance, office furniture, fixtures, and equipment get 10 years under ADS but seven under GDS. A natural gas production plant has 14 years in ADS and seven in GDS.
Impact on Financial Results
Using accelerated depreciation like in GDS, or choosing between GDS and ADS, can seriously affect your reported financials. That's something you need to consider when planning your taxes.
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