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Publication 946 2001 Tax Year

Which Depreciation Method Applies?

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.

Caution: 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 3-1 lists the types of property you can depreciate under each method. It also give a brief explanation of the method.


Depreciation Methods for Farm Property

If you place personal property in service in a farming business after 1988, you can depreciate it under GDS using any method other than the 200% declining balance method. You can depreciate real property using the straight line method under either GDS or ADS.

Farming business. A farming business is any trade or business involving cultivating land or raising or harvesting any agricultural or horticultural commodity. A farming business includes the following.

  • Operating a nursery or sod farm.
  • Raising or harvesting crops.
  • Raising or harvesting trees bearing fruit, nuts, or other crops.
  • Raising ornamental trees. An evergreen tree is not an ornamental tree if it is more than 6 years old when it is severed from its roots.
  • Raising, shearing, feeding, caring for, training, and managing animals.

Processing activities. In general, a farming business includes processing activities that are normally part of the growing, raising, or harvesting of agricultural products. However, a farming business generally does not include the processing of commodities or products beyond those activities that are normally part of the growing, raising, or harvesting of such products.

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

ADS required for some farmers. 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.

Table 3-1. 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
� 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. 1
GDS using SL � Nonresidential real property
� Residential rental property
� Trees or vines bearing fruit or nuts
� Water utility property
� All 3-, 5-, 7-, 10-, 15-, and 20-year property 2		 � 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.
� Tax-exempt property
� Tax-exempt bond- financed property
� Imported property 3
� Any property for which you elect to use this method 2		 � Provides for equal yearly deductions.
1The MACRS percentage tables in Appendix A have the switch to the straight line method built into their rates.
2Elective method.
3See section 168(g)(6) of the Internal Revenue Code.


Electing a Different Method

As shown in the Depreciation Methods table, 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 can still 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.

Caution: 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 in the year of the election. However, you can make the election on a property-by-property basis for nonresidential real and residential rental property.

150% election. 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 II of Form 4562.

Straight line election. 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 "SL" under column (f) in Part II of Form 4562.

Election of ADS. 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 ADS Recovery Periods table, earlier.

Make the election by completing line 16 in Part II of Form 4562.

Farm property. Instead of using the 150% declining balance rate over a GDS recovery period for property you use in a farming business, 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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