42.9 Straight-Line Depreciation

You may not want an accelerated rate and may prefer to write off depreciation at an even pace. There are two straight-line methods. You may make an irrevocable election to use the straight-line method over the regular MACRS recovery period (42.4) under the general depreciation system (GDS). Alternatively, you may elect straight-line recovery over the designated recovery period for the class life under the alternative depreciation system (ADS). For some assets, such as cars, the GDS and ADS recovery periods are the same (five years for a car). In most cases, the ADS recovery period is longer than the GDS recovery period. For example, the recovery period for office furniture and fixtures is seven years under GDS and 10 years under ADS.

Half-year and quarter-year conventions apply to both straight-line methods (42.6, 42.7). A mid-month convention applies under the straight-line rule for buildings (42.13).

Filing Tip

Should You Elect Straight-Line Recovery?

Accelerated rates of MACRS merely give you an opportunity to advance the time of taking your deduction. This may be a decided advantage where the higher deductions in the first few years will provide you with cash for working capital or for investments in other income-producing sources. That is, by accelerating the deductions, you defer the payment of taxes that would be due if you claimed smaller depreciation deductions, using more conservative straight-line rates. The tax deferral lasts until the rapid method provides lower depreciation deductions than would the more conservative method. You are generally more likely to benefit from accelerated MACRS in an ongoing business.

If you are starting a new business in which you expect losses or low income at the start, accelerated MACRS may waste depreciation deductions that could be used in later years when your income increases. Therefore, before deciding to use accelerated MACRS rates, consider your income prospects.

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Straight-line over regular recovery period (GDS).

You make this election on Form 4562, Part III, Section B, labeled “General Depreciation System” (GDS). To elect this method for one asset, you must also use it for all other assets in the same class that are placed in service during the year. The straight-line election is irrevocable.

Straight-line under the alternative depreciation system (ADS).

Under the alternative depreciation system (ADS), the straight-line recovery period is generally the same as the “class life” of the asset as determined by the IRS; the ADS recovery periods are shown in IRS Publication 946. The ADS recovery period for cars, light trucks, and computers is five years, the same as under the GDS. For business office furniture and fixtures, the ADS straight-line recovery period is 10 years. The ADS recovery period for personal property with no class life is 12 years. For nonresidential real and residential rental property, you may elect ADS straight-line recovery over 40 years. See IRS Publication 946 for other ADS class lives.

Except for real estate, the ADS election applies to all property within the same class placed in service during the taxable year. For real estate, the election to use the alternative depreciation method may be made on a property-by-property basis. The election is irrevocable. The deduction is claimed on Form 4562, Part III, Section C, labeled “Alternative Depreciation System” (ADS).

Straight-line rate table.

The table below shows straight-line rates for five-year, seven-year, and 10-year property under the half-year convention. As discussed earlier, the recovery period depends on whether the GDS or ADS straight-line method is used. If you are subject to the mid-quarter convention (42.7), see IRS Publication 946 for tables showing the applicable rates.

Table 42-3 Half-Year Convention—Straight-Line Rate

AMT depreciation.

There is no AMT adjustment for depreciation if for regular tax purposes straight-line depreciation is claimed on tangible personal property placed in service after 1998. Similarly, for real estate placed in service after 1998, the straight-line depreciation deduction claimed for regular tax purposes does not have to be refigured for AMT. If for regular tax purposes straight-line depreciation is claimed for tangible personal property placed in service before 1999, then for AMT purposes straight-line depreciation is figured over the property’s class life under the alternative depreciation system (ADS). For real property placed in service before 1999, regular tax straight-line depreciation is refigured for AMT purposes using the straight-line method over 40 years.

Mandatory straight-line depreciation.

You are required to use the alternative depreciation system for automobiles (43.3) and certain computers (42.10) used 50% or less for business.

Alternative MACRS depreciation must also be used for:

• Figuring earnings and profits;
• Tangible property which, during the taxable year, is used predominantly outside the United States;
• Tax-exempt use property;
• Tax-exempt bond financed property; and
• Imported property covered by an executive order.