# Alternative Depreciation System (ADS) Explained: Uses and GDS Comparison

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## What Is an Alternative Depreciation System (ADS)?

An alternative depreciation system (ADS) is a taxation method required by the IRS for calculating depreciation on [business assets](https://www.investopedia.com/terms/b/business-asset.asp) over a longer recovery period. This system allows businesses to align depreciation with actual income streams, potentially offering a more economically accurate reflection than the General Depreciation System (GDS). Ultimately, the choice of ADS impacts asset management and financial planning.

### Key Takeaways

*   The Alternative Depreciation System (ADS) offers longer recovery periods with straight-line depreciation, spreading deductions evenly over an asset's useful life.
*   Taxpayers can voluntarily elect ADS, but once chosen, they cannot switch back to the General Depreciation System (GDS) for that asset class.
*   ADS results in smaller annual deductions compared to GDS, leading to higher initial taxable income and potential cash flow challenges.  
    
*   Certain properties, like those predominantly used outside the U.S., must use ADS, reflecting IRS regulations for specific asset classes.  
    
*   Although ADS contributes to more stable financial planning, it may complicate tax compliance due to its slower depreciation schedule and mandatory application for specific assets.

## How the Alternative Depreciation System (ADS) Works 

Depreciation lets businesses spread the cost of a physical asset over its [useful life](https://www.investopedia.com/terms/u/usefullife.asp), a set number of years. The useful life of an asset is an estimate of the number of years a company will use that asset to help generate revenue. The IRS allows businesses to depreciate many kinds of business assets, including computers and peripherals; office furniture, fixtures, and equipment; automobiles; and manufacturing equipment.

Taxpayers choose ADS because it better matches depreciation with income compared to the general system. ADS extends the depreciation period but reduces annual depreciation costs. The depreciation amount is set at an equal amount each year with the exception of the first and last years, which are generally lower because they do not include a full twelve months.

> **Important**
>
> Taxpayers need to be cautious about selecting the alternative depreciation system. According to IRS rules, once a taxpayer has chosen to use the alternative depreciation system for an asset, they can't switch back to the general depreciation system.

## Comparing ADS and GDS: Key Differences Explained 

For property used after 1986, the IRS mandates using the [Modified Accelerated Cost Recovery System (MACRS)](https://www.investopedia.com/terms/m/macrs.asp) for depreciation. There are two methods that fall under the MACRS: the [general depreciation system](https://www.investopedia.com/terms/g/generaldepreciationsystem.asp) (GDS) and the alternative depreciation system (ADS).

ADS offers longer depreciation periods than the general system, which uses the [declining balance method](https://www.investopedia.com/terms/d/decliningbalancemethod.asp). The general depreciation system is often used by companies to depreciate assets that tend to become obsolete quickly and are replaced with newer versions on a fairly frequent basis. Computers and phone equipment are examples of this.

GDS lets companies accelerate depreciation by taking larger deductions early and smaller ones later. The general depreciation system is more commonly used than the alternative depreciation system.

## Properties Eligible for the Alternative Depreciation System 

Here is a non-exhaustive list of properties that qualify for ADS treatment:

*   **Property Used Predominantly Outside the United States:** Property used predominantly outside the United States must use ADS for depreciation purposes. According to IRC Section 168(g)(1)(A), property that is used mainly outside the U.S. does not qualify for accelerated depreciation under the General Depreciation System (GDS).
*   **Tax-Exempt Use Property:** Tax-exempt use property, defined under IRC Section 168(g)(1)(B), must be depreciated using ADS. This includes property leased to tax-exempt entities such as governmental units or organizations exempt from tax under IRC Section 501.
*   **Property Where the Taxpayer Elects ADS:**  
    Taxpayers can voluntarily elect to use ADS for any property, as IRC Section 168(g)(7) allows.
*   **Residential Rental Property:** Residential rental property is subject to ADS if it is used predominantly outside the United States or is tax-exempt use property. This is per IRC Section 168(g)(2)(C).
*   **Nonresidential Real Property:** Nonresidential real property, like office buildings and commercial facilities, must use ADS if it falls under any categories requiring ADS. This categories are outlined in IRC Section 168(g)(2)(C) as well.
*   **Qualified Improvement Property**  
    Qualified improvement property (QIP), which includes interior improvements to nonresidential real property, must use ADS if it is subject to [tax-exempt bond financing](https://www.investopedia.com/terms/t/tax_exempt_security.asp) or other ADS requirements. This is outlined per IRC Section 168(g)(2)(B).uch property.

> **Fast Fact**
>
> Some properties must use ADS depreciation; others can choose it voluntarily.

## Advantages of Using the Alternative Depreciation System 

A key advantage of ADS is its consistent and predictable depreciation expense. Unlike GDS which provides higher [deductions](https://www.investopedia.com/terms/d/deduction.asp) in the early years of an asset's life, ADS spreads the depreciation expense evenly over a longer period. This consistency can help businesses better forecast their future expenses and taxable income.

ADS also helps businesses avoid large fluctuations in taxable income. By spreading out depreciation deductions evenly, ADS prevents the high depreciation expenses in the initial years that are typical under GDS. Again, this can help with cash flow planning and budgeting.

ADS can also be beneficial for long-term financial planning and investment strategies. For long-term assets, ADS aligns depreciation with the asset's economic use. For example, ADS might give an asset a longer life, and this may align with the actual useful life of that asset. This means that it may be easier for companies to track and make decisions on what assets to retire and re-invest in because useful lives are more aligned.

## Potential Drawbacks of the Alternative Depreciation System

Let's turn our attention to the downsides of ADS. One of the downsides is the slower rate of depreciation. This results in smaller annual deductions, leading to higher taxable income in the early years of an asset's life. This means businesses may face higher tax liabilities initially.

Another disadvantage of ADS is the potential for reduced cash flows. Because companies may face higher tax liabilities upfront, this means companies must have higher amounts of [cash on hand](https://www.investopedia.com/terms/c/cashflow.asp) to pay potentially higher tax expenses when it comes time to file IRS annual returns.

Using ADS for certain properties can complicate tax planning and compliance. Though the IRS maintains lists of properties required to use ADS, it may not be evidently clear how to depreciate each type of asset. Managing these requirements involves keeping detailed records, especially if a company has a mix of assets subject to both ADS and GDS.

## Important Considerations for Choosing ADS 

Depreciating [tax implications of calculating depreciation](https://www.investopedia.com/ask/answers/031815/what-tax-impact-calculating-depreciation.asp) can impact a company's profitability. For this reason, business owners need to carefully consider the pros and cons of ADS versus GDS. 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](https://www.irs.gov/publications/p946).

## What Is the Alternative Depreciation System?

ADS is a method of calculating depreciation for tax purposes, specified under the Internal Revenue Code in the United States. Unlike the General Depreciation System (GDS), which allows for accelerated depreciation, ADS typically requires a longer recovery period, resulting in smaller annual depreciation deductions.

## Can ADS Be Elected Voluntarily?

Yes, taxpayers can voluntarily elect to use ADS instead of GDS.

## How Is the Depreciation Period Determined Under ADS?

The depreciation period under ADS is generally longer than that under GDS. For example, residential rental property has a recovery period of 30 years under ADS, compared to 27.5 years under GDS. The specific period depends on the type of property and its use, and periods can be determined using tax tables.

## How Does ADS Affect Taxable Income?

ADS affects taxable income by spreading the depreciation deductions over a longer period, leading to lower annual deductions. This results in higher taxable income in the early years compared to GDS. Over time, the total depreciation expense remains the same, but the impact on taxable income is more evenly distributed.

## The Bottom Line

The Alternative Depreciation System (ADS) extends the depreciation period of assets, providing consistent annual tax deductions and aligning with the asset's economic life. While ADS can offer greater predictability in financial planning, it may lead to higher initial taxable income and reduced cash flow compared to the General Depreciation System (GDS). Businesses should carefully evaluate whether the longer recovery period and steadier deduction schedule of ADS align with their financial strategies. Once elected, the ADS method cannot be switched back to GDS for the same asset class in the same year, underscoring the importance of informed decision-making.

> **Article Sources**
>
> 1.  Cornell Law School. "[IRC Section 168](https://www.law.cornell.edu/uscode/text/26/168)."