What Is Asset Depreciation Range (ADR)?
Asset depreciation range was an accounting method established by the Internal Revenue Service (IRS) in 1971 to determine the useful economic life of specific classes of depreciable assets.
- Asset depreciation range (ADR) was the method set by the IRS for determining the useful life of business equipment and other property eligible for the depreciation deduction.
- The modified accelerated cost recovery system (MACRS) is the current accounting method used by businesses claiming the deduction.
- Both methods set a time period over which depreciation of the property can be deducted from a business' tax return.
Understanding Asset Depreciation Range (ADR)
Depreciation is an annual income tax deduction that helps businesses recover the cost of certain properties over their useful lifetimes. The IRS calls it "an allowance for the wear and tear, deterioration, or obsolescence of the property."
Buildings, equipment, vehicles, furniture, and machinery all can qualify for the deduction, as can patents and copyrights.
The ADR method was used to assign upper and lower limits to the estimated useful lives of asset classes. It gave businesses considerable flexibility to determine the useful life of an asset.
In fact, the asset depreciation range allowed the taxpayer a 20% leeway above and below the IRS's established useful life for each asset class. Thus, if the established useful life of a desk was considered to be 10 years, the taxpayer could depreciate it within a range of eight to 12 years.
ADR was introduced in an attempt to simplify calculations and provide some uniformity to tax deductions from depreciation. But the system was too complicated. It listed more than 100 classes of tangible assets based on the taxpayer's business and industry.
Not surprisingly, this brought many taxpayers and the IRS into disagreements over the useful life and salvage value of business assets.
Finally, ADR was replaced by the ACRS (accelerated cost recovery system), and finally by the MACRS (modified accelerated cost recovery system). The latter was part of the Tax Reform Act of 1986.
Businesses with assets that were in use before 1987 must use the older ACRS method rather than the current MACRS method.
The MACRS system in use today allows for greater accelerated depreciation over longer time periods. Today, for example, that desk can be depreciated over seven to 10 years.
The changes in methods have created some complications for businesses that have been around for a while. In general, the IRS says that owners of assets that were put into operation before 1987 must continue to use the older ACRS method or the same method that the business used in the past.
The depreciation deduction can be used only for property that is used for business or another income-producing activity. That may even include partial use. For example, a partial deduction might be available for a car that is used for personal errands as well as a part-time business.
The form used to claim the depreciation deduction is IRS Form 4562.