DEFINITION of 'Alternative Depreciation System - ADS'

Alternative depreciation system is a depreciation schedule with a longer recovery period that generally better mirrors the asset's income streams than declining balance depreciation. If alternative depreciation system is elected, it must be applied to all property of the same class placed in service during the same year. Taxpayers who elect to use the alternative depreciation system feel that the alternative schedule will allow for a better match of depreciation deductions against income than the recovery period under the general depreciation system. Once they have chosen alternative depreciation system, the taxpayer can not switch back.

BREAKING DOWN 'Alternative Depreciation System - ADS'

For property placed in service after 1986, the IRS requires that the Modified Accelerated Cost Recovery System (MACRS) be used to depreciate the property. There are two methods which fall under Modified Accelerated Cost Recovery System: General Depreciation System and Alternative Depreciation System. The Alternative Depreciation System offers depreciation over a longer period of time than the general depreciation system which is a declining balance method.

Since the alternative depreciation system offers depreciation over a longer course of time, the yearly deductions for depreciation are smaller than with the other method. Taxpayers who choose the alternative depreciation system schedule must use this schedule for all property of the same class that was placed in service during the taxable year. However, taxpayers may elect the alternative depreciation system schedule for real estate on a property-by-property basis. The alternative depreciation system recovery schedule is listed in IRS Publication 946.

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