Alternative Depreciation System (ADS)

Under the Tax Reform Act of 1986, the Alternative Depreciation System (ADS) replaces the straight-line, alternate ACRS formula and table methods (methods SA and ST) for assets acquired after 1986. The ADS straight-line depreciation method and recovery periods (estimated lives) are as long or longer than recovery periods under the MACRS General Depreciation System (GDS).

You must use the ADS for certain property (property located outside the United States, property used for tax-exempt purposes, and others). The 2017 Tax Cuts Act (P.L. 115-97) requires the use of ADS for residential rental property, nonresidential real property, and qualified improvement property owned by a real property trade or business if they elect out of the rules in Section 163(j) which limit the business deduction for net interest expense.

Businesses that do not want to take advantage of accelerated depreciation in the early years of an asset's life can elect to depreciate their property under ADS. You make the ADS election year by year. For personal property, you must make it for all properties in the same class acquired during the year. For real property, you can elect ADS on a property-by-property basis.

The application has four ADS depreciation methods, AD, AA, RH and RM. Generally, use method AD or AA for all property originally placed in service and depreciated under the Alternative Depreciation System rules. Both methods apply the straight-line method and the appropriate averaging convention (half-year or mid-month) based on the property type and the estimated life of the asset. Method AA, ADS Straight-line MACRS Plus 168, is used when the asset is qualified for the 168 Allowance amount.

Property which must use ADS is not eligible for bonus deprecation (168 Allowance). Property for which ADS is elected is eligible for bonus.

Change in Use

If a change in use occurs for an asset placed in service in a prior year, use method RH or RM to perform a critical depreciation field change. Methods RH and RM spread the remaining basis of the asset over its remaining life, as of the date of change you specify. See RH and RM Methods Overview for more details.