General Depreciation System (GDS)

The general depreciation system is the most commonly used modified accelerated cost recovery system (MACRS) for calculating depreciation. A general depreciation system uses the declining-balance method to depreciate personal property.

The declining-balance method involves applying the depreciation rate against the non-depreciated balance. For example, if an asset that costs $1,000 is depreciated at 25% each year, the deduction is $250.00 in the first year and $187.50 in the second year, and so forth.

The Modified Accelerated Cost Recovery System or MACRS is the primary method of depreciation for federal income tax purposes allowed in the U.S. to determine depreciation deductions. The MACRS system of depreciation allows for larger depreciation deductions in the early years and lower deductions in the later years of ownership. Under MACRS, the deduction for depreciation is calculated by one of the following methods: the declining balance method and the straight-line method.

Under MACRS a taxpayer must compute tax deductions for depreciation of tangible property using specified lives and methods. Assets are divided into classes by type of asset or by business in which the asset is used. There are two sub-systems of MACRS: the general depreciation system (GDS) and alternate depreciation system (ADS). GDS is the most relevant and is used for most assets.

IRS asset classes under the GDS and ADS systems will assign class lives based on varying estimates of asset life. For example, office furniture, fixtures, and equipment use a class life of 10 years under the ADS method and seven years under the GDS method. A natural gas production plant has an ADS class life of 14 years and a GDS class life of seven years.

Accelerated depreciation methodologies and the selection of GDS or ADS systems can have a material impact on reported financial results.