Publication 946 - How to Depreciate Property - Which Depreciation Method Applies?

Publication 946

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Words you may need to know (see Glossary)

Declining balance method
Listed property
Nonresidential real property
Placed in service
Property class
Recovery period
Residential rental property
Straight line method
Tax exempt

MACRS provides three depreciation methods under GDS and one depreciation method under ADS.

The 200% declining balance method over a GDS recovery period.
The 150% declining balance method over a GDS recovery period.
The straight line method over a GDS recovery period.
The straight line method over an ADS recovery period.

For property placed in service before 1999, you could have elected the 150% declining balance method using the ADS recovery periods for certain property classes. If you made this election, continue to use the same method and recovery period for that property.

Table 4-1 lists the types of property you can depreciate under each method. It also gives a brief explanation of the method, including any benefits that may apply.

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Depreciation Methods for Farm Property

If you place personal property in service in a farming business after 1988, you generally must depreciate it under GDS using the 150% declining balance method unless you are a farmer who must depreciate the property under ADS using the straight line method or you elect to depreciate the property under GDS or ADS using the straight line method. You can depreciate real property using the straight line method under either GDS or ADS.

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Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a recovery period of 10 years.

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If you elect not to apply the uniform capitalization rules to any plant produced in your farming business, you must use ADS. You must use ADS for all property you place in service in any year the election is in effect. See the regulations under section 263A of the Internal Revenue Code for information on the uniform capitalization rules that apply to farm property.

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Electing a Different Method

As shown in Table 4-1, you can elect a different method for depreciation for certain types of property. You must make the election by the due date of the return (including extensions) for the year you placed the property in service. However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Attach the election to the amended return and write "Filed pursuant to section 301.9100-2" on the election statement. File the amended return at the same address you filed the original return. Once you make the election, you cannot change it.

If you elect to use a different method for one item in a property class, you must apply the same method to all property in that class placed in service during the year of the election. However, you can make the election on a property-by-property basis for nonresidential real and residential rental property.

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Instead of using the 200% declining balance method over the GDS recovery period for nonfarm property in the 3-, 5-, 7-, and 10-year property classes, you can elect to use the 150% declining balance method. Make the election by entering "150 DB" under column (f) in Part III of Form 4562.

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Instead of using either the 200% or 150% declining balance methods over the GDS recovery period, you can elect to use the straight line method over the GDS recovery period. Make the election by entering
"S/L" under column (f) in Part III of Form 4562.

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As explained earlier under Which Depreciation System (GDS or ADS) Applies, you can elect to use ADS even though your property may come under GDS. ADS uses the straight line method of depreciation over fixed ADS recovery periods. Most ADS recovery periods are listed in Appendix B, or see the table under Recovery Periods Under ADS, earlier.

Make the election by completing line 20 in Part III of Form 4562.

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Instead of using the 150% declining balance method over a GDS recovery period for property you use in a farming business (other than real property), you can elect to depreciate it using either of the following methods.

The straight line method over a GDS recovery period.
The straight line method over an ADS recovery period.

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Table 4-1. Depreciation Methods

Note. The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL.
Method	Type of Property	Benefit
GDS using 200% DB	• Nonfarm 3-, 5-, 7-, and 10-year property	• Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction
GDS using 150% DB	• All farm property (except real property) • All 15- and 20-year property (except qualified leasehold improvement property and qualified restaurant property placed in service before January 1, 2012) • Nonfarm 3-, 5-, 7-, and 10-year property	• Provides a greater deduction during the earlier recovery years • Changes to SL when that method provides an equal or greater deduction¹
GDS using SL	• Nonresidential real property • Qualified leasehold improvement property placed in service before January 1, 2012 • Qualified restaurant property placed in service before January 1, 2012 • Residential rental property • Trees or vines bearing fruit or nuts • Water utility property • All 3-, 5-, 7-, 10-, 15-, and 20-year property² • Property for which you elected section 168(k)(4)	• Provides for equal yearly deductions (except for the first and last years)
ADS using SL	• Listed property used 50% or less for business • Property used predominantly outside the U.S. • Qualified leasehold improvement property placed in service before January 1, 2012 • Qualified restaurant property placed in service before January 1, 2012 • Tax-exempt property • Tax-exempt bond-financed property • Farm property used when an election not to apply the uniform capitalization rules is in effect • Imported property³ • Any property for which you elect to use this method²	• Provides for equal yearly deductions
¹The MACRS percentage tables in Appendix A have the switch to the straight line method built into their rates
²See section 168(g)(7) of the Internal Revenue Code.
³See section 168(g)(6) of the Internal Revenue Code

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Which Depreciation Method Applies?(p41)

Depreciation Methods for Farm Property(p42)

Fruit or nut trees and vines.(p42)

ADS required for some farmers.(p42)

Electing a Different Method(p43)

150% election.(p43)

Straight line election.(p43)

Election of ADS.(p43)

Farm property.(p43)

Table 4-1. Depreciation Methods