Table of Contents
The general Depreciation system is the most widely used system that helps to evaluate depreciation. This system basically uses the method of declining balance to depreciate personal property.
Generally, the Declining Balance Method needs the application of depreciation rate against the balance that is non-depreciated. For instance, if an asset has a value of Rs. 1000 and it is depreciated at 15% every year, the Deduction in the first month will be Rs. 250, in the second month, it will be Rs. 187.50, and so on.
There are specific asset methods and lives that help to compute the tax deductions for depreciation of property that is tangible. Typically, assets get divided into classes by their type or by the business wherein that specific asset is being used.
In a way, there are two sub-systems, the General Depreciation System (GDS) and the Alternate Depreciation System (ADS). Out of these two, the former one is used for most of the assets and is considered the most relevant one as well.
Every depreciation system varies in regards to the number of years over which the asset could be depreciated. Generally, the GDS uses shorter periods of recovery in comparison to the ADS. And, the latter one sets depreciation as an equal amount every year, barring the first and the last year, which may not be a complete period of 12 years.
This method decreases the annual depreciation cost as there are more years over which the asset gets depreciated. But specific assets come with the same recovery period in both of these systems. For instance, computers, trucks, cars, and more get depreciated over a period of five years, irrespective of the employed system that they have.
However, make sure that the ADS system for all of the assets is used in a certain class. In case this system doesn’t get selected for a certain asset, later, the GDS system cannot be used. Under the ADS and GDS systems, IRS asset classes assign class lives on the Basis of different estimates of the asset’s life.
For instance, office equipment, fixtures and furniture use a class life of up to 10 years under the ADS method, and it is up to 7 years under the GDS method. Whereas, a natural gas production plant has a GDS life of 7 years and the ADS life of 14 years.