The Internal Revenue Service has specific guidelines for the depreciation of fixed assets. Taxpayers may be able to amortize certain assets, such as patents or copyrights, that do not qualify as a depreciable asset. Amortization allows the recovery of capital expenses over time, similar to depreciation. The IRS states that most property with an initial in-service date after 1986 must use the Modified Accelerated Cost Recovery System (MACRS), which in turn utilizes the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Each system classifies assets differently, and ADS has longer recovery periods for most assets. Most businesses use the GDS for depreciation.
Three-Year Property under GDS
Three-year property includes over-the-road tractors, race horses over the age of 2 at their initial service placement or other horses over the age of 12 at initial service placement and rent-to-own property that qualifies as tangible consumer property for home or personal use.
Five-Year Property under GDS
Five-year property includes vehicles such as cars, buses, trucks and taxis; office machinery, including computer equipment; property for research and development; breeding cattle; furniture, fixtures and improvements for a residential rental; and certain alternative energy equipment.
Seven-Year Property under GDS
Office furniture such as file cabinets and fixtures such as safes are seven-year assets. Equipment and machinery for agricultural production, gathering lines for natural gas if placed in service after April 11, 2005, certain motorsports complex property in service prior to Jan. 1, 2012, and any property for which the IRS does not designate a class are examples of seven-year property.
10-Year Property under GDS
Property with a 10-year life includes boats, barges and other equipment for water transportation, nut or fruit-bearing vines and trees, and any structure with a single horticultural or agricultural purpose. If not in service prior to Oct. 3, 2008, qualified electric meters and grid systems also have a 10-year life.
15-Year Property under GDS
Landscaping and improvements to land such as bridges or sidewalks have a 15-year life. Restaurant property and retail or leasehold improvements in service prior to Jan. 1, 2012, have a 15-year depreciable life. Use a 15-year depreciation period for city treatment plants for wastewater and retail fuel outlets. The initial grading or clearing of land for a gas utility, a distribution line for natural gas that began service after April 11, 2005 and Section 1245 property for transmitting electricity at a minimum of 69 kilovolts entering service since April 11, 2005, are additional examples of 15-year property.
20-Year Property under GDS
All farm buildings that do not qualify as 10-year property, city sewers that do not qualify for a 25-year life and grading or clearing land for plants distributing and transmitting electricity are 20-year properties.
25-Year Property under GDS
The only property with a 25-year depreciation period is for water utilities. This class includes city sewers not placed in service through a binding agreement not continuously in effect since June 9, 1996. Otherwise, the sewers have a 20-year life. This class also includes integral elements for treating, gathering or distributing water.
27.5-Year Property under GDS
The IRS uses the 27.5-year class for residential rental property, including apartments and mobile homes. It does not apply to any building for temporary or transient occupation if more than 50 percent of the units are for such use. In addition, a minimum of 80 percent of the property’s gross income for rent must derive from dwelling units rather than other rent, such as the rent of storage space or parking spaces. If the owner also is an occupant, the gross income from rent includes the fair market value of the unit the owner occupies.
39-Year Property Under GDS
Real estate that is not residential and does not qualify in another class with a life of 27.5 years or less has a 39-year depreciable life. Examples include retail spaces, warehouses and office buildings.