Once you have determined your property is depreciable you must determine the class life assigned by the IRS. The Table of Asset Class Lives and Recovery Periods (CLDR) is used for this purpose. It can be located on the IRS website.

There are two methods of determining class life for a piece of non-real property, the General Depreciation System (GDS) or the Alternative Depreciation System (ADS). GDS uses a method that allows the expense for the property to be recovered more quickly in the earlier years of it”s class life. And ADS is a straight line method which basically takes the number of years of the class life and depreciates an equal amount each year over the entire life of the property.

For the most part property that is not defined as real property has one of six class lives; 3yr, 5yr, 7yr, 10yr, 15yr, or 20yr. These class lives are not the amount of time the property is depreciated over, but the useful life the IRS has assigned to that property. You must use the CLDR tables to determine the recovery period. The recovery period will be different depending on whether you are using GDS or ADS as a recovery method.

For Example: Office Furniture is listed on the CLDR tables as having a class life of 10 years. For GDS that equates to a depreciation period of 7 years, but for ADS the depreciation takes place over the full 10 year established class life unless disposed of earlier.

The choice of GDS or ADS on some of the longer-lived pieces of property can make a big difference in the taxpayers total depreciation deduction and should be a part of tax planning with your client. Once an election to use the slower method (ADS) is chosen it may not be changed at a later date.

Conventions

MACRS does not use a daily basis to prorate property placed into or taken out of service during a tax year. There are three conventions that are used for assets and are strictly based on the type of asset and the date placed in service.

The half-year (HY) convention is used for all non-real property placed into service during the year unless the mid-quarter convention (below) is required. The asset is assumed to have been in service for exactly half the year, regardless of the date actually placed in service, and the owner gets half the normal depreciation in the first and last year of service.

Mid-quarter (MQ) convention is used, instead of HY, if more than 40% of the total value of all assets in that class life are placed in service during the last quarter of the tax year. This convention establishes that all property was placed in service in the middle of the applicable quarter.

For Example: I place in service 1 piece of machinery in April with a basis of $7000. I place another piece in service in August with a basis of $1000. And I place a third into service in November with a value of $7000. All the machinery is 5 year property. My total 5 year assets placed in service during the year is $15000. Of that more than 40% ($15000 X .4 = $6000) was placed into service in November. Therefore, all my 5 year class life assets placed in service that tax year must be depreciated using the MQ convention.

The Mid-Month (MM) convention is used for all real property. This convention assumes that all property was placed in service in the middle of the applicable month.

There is a table directly behind the CLDR listings and before the depreciation tables to provide a quick reference to which table to use based on the method you chose, GDS or ADS, and the type of property.

Next up, calculating the depreciation with GDS and ADS.

In accordance with Circular 230 Disclosure