Estimated Life and ADS Life

The estimated life of an asset is the period over which an asset is to be depreciated or its cost is to be recovered. The Estimated Life field in the Tax book has nothing to do with the physical life span of an individual asset. Physical life is the normal period of use in the particular business or trade, during which the asset remains physically productive as a capital asset. Physical life is usually based on experience in replacing that type of property. Although the Internal book should use the asset’s expected physical life, the Tax book must use the life or recovery period prescribed by the IRS. The shorter the estimated life, the more rapidly you can recover the cost of an asset through depreciation.

ADS life is similar to estimated life in that it also is a period over which an asset is to be depreciated, not a period of physical usefulness. ADS life is the life assigned to the asset type under the MACRS Alternative Depreciation System. For most assets, the ADS life is the midpoint of the Asset Depreciation Range (ADR) in which the asset belongs. ADS lives tend to be longer than estimated lives and so are often used in internal books, where they reduce profits more slowly than estimated lives.

For information on how the system uses entries in these two fields, see the Estimated Life field and the ADS Life field.

To control the tax advantages that result from estimated life, Congress has prescribed estimated lives for various classes of assets. Estimated lives created under the IRS rules for ACRS and MACRS assets are called recovery periods. Recovery periods are set by statute for different kinds of property. These IRS recovery periods are generally shorter than estimated lives in other depreciation methods and shorter than physical lives. A combination of shorter recovery lives and higher recovery rates in the early years of an asset's life accelerate cost recovery.

Important! : To help you determine the correct estimated life and/or ADS life for an asset for the Tax book, you can use the IRS Table link located in Asset Detail. Here you will find an easy-to-use version of the IRS ADR Class Life Table.