General Depreciation System – Definition

Cite this article as:"General Depreciation System – Definition," in The Business Professor, updated July 30, 2019, last accessed August 3, 2020, https://thebusinessprofessor.com/lesson/general-depreciation-system-definition/.

Back to: ACCOUNTING, TAX, & REPORTING

General Depreciation System Definition

General Depreciation System (GDS) refers to a method used to compute personal property’s depreciation. GDS allows the use of tax depreciation (declining-balance-method) under the Modified Accelerated Cost Recovery System (MACRS). This works within a recovery period that is shorter as compared to the Alternative Depreciation System (ADS).

 Key Takeaways

  • General Depreciation System (GDS) refers to a method used to compute personal property’s depreciation.
  • Modified accelerated cost recovery system (MACRS) is the main method of depreciation when it comes to federal income tax in the United States.
  • MARCS operates under two sub-systems; alternative depreciation system and general depreciation system respectively.
  • General depreciation system is the most common method when it comes to calculating depreciation of assets under the method of MACRS.

Understanding the General Depreciation System (GDS)

Generally, GDS is the most common method when it comes to calculating depreciation of assets under the method of MACRS. While real property for residential as well as nonresidential is depreciated using the straight-line method, personal property uses the declining-balance method to be declined. The declining-balance method is used in the beginning and then it is substituted with a straight line method. The substitution happens when there is a larger yield deduction.

How General Depreciation System Works (Example)

Since GDP applies the use of the declining-balance method let as look at how it works in the example below:

Let’s assume that an asset costing $1,000 undergo a depreciation of 25% every year. The deduction is $250.00 in year one and then $187.50 in year two, and so on.

About Modified Accelerated Cost Recovery System (MACRS)

Modified accelerated cost recovery is the main method of depreciation when it comes to federal income tax in the United States. It is used to determine deductions related to depreciation. It is preferred because it paves way for larger deductions of depreciation in the first years and then fewer deductions in the future years of possession.

Using the MARCS method, the depreciation’s deduction is calculated using one of the below methods:

  • Declining-balance method
  • Straight-line method

Note that when working under the MACRS method, a taxpayer must use specified lives and method to calculate tax deduction for tangible property’s depreciation. Also, when you dividing assets into a different set of classes, then you have to do it as per the asset’s type or according to the business in which the asset is used. MARCS operates under two sub-systems. They include:

  • Alternative depreciation system
  • General depreciation system

The difference between the above two depreciation systems is the number of years you decide to depreciate an asset. Note that the general depreciation system usually uses a recovery period that is shorter compared to the alternative depreciation system.

However, there are particular assets which have a similar recovery period when applied under either of the two systems. Examples of assets that have the same recovery period under any of the two systems are cars, computers and light-duty Lorries. The recovery period of these assets is 5 years if applied under either of the systems.

References for “General Depreciation System – GDS”

Was this article helpful?