US tax law requires taxpayers to comply with country-specific regulations when calculating depreciation. Property with a useful life of three years or more must be depreciated, and taxpayers can use the General Depreciation System (GDS) or Alternative Depreciation System (ADS) method. Farmers have a more complex set of calculations, with properties of different values and depreciation terms. Business plans and expected cash flow changes are critical when making tax elections.
Different countries have different tax laws. When calculating depreciation, the taxpayer must comply with the tax laws of the country to which taxes are owed. In the United States, all property purchased for income production may be spent or depreciated. Consumer goods are treated as current expenses, just like electricity and telephone costs. Property deemed to have a useful life of three years or more must be depreciated, and the taxpayer must calculate depreciation values for their personal and business property using a general depreciation system (GDS) or alternative depreciation system method. (ADS).
In the US, the depreciable life of property has been codified, and it is possible to find out what the taxable life of an asset is. Under the General Depreciation System (GDS), the default method for calculating depreciation is a 200% declining balance, which automatically changes to straight-line depreciation the moment the taxpayer receives a greater benefit from this method. A taxpayer may, initially, elect a 150% declining balance or straight-line depreciation instead of the 200% declining balance. The alternative depreciation system (ADS) is straight-line only.
When preparing to make a tax election on newly purchased property under US tax law jurisdictions and calculating depreciation, the first step is to check the class life of the property. The second step is for the taxpayer to look at your business plan. Any expected change in cash flow that the taxpayer’s business will generate is the critical issue. If cash flow will grow sharply over the next five years, straight-line depreciation for recently purchased items might make more sense because the increase in taxable income doesn’t want to be combined with the decrease in depreciation. If the growth of your business adds equipment, the taxpayer should take the default option, a 200% declining balance, because later you will increase your depreciation by adding equipment.
In the United States, farmers have a more complex set of calculations than most ordinary office-oriented businesses. When calculating depreciation, the farmer will routinely have properties with different values and depreciation terms. Like office-oriented businesses, most farmers have five-year-old property, including cars, computers, and photocopiers, as well as seven-year-old property, including tractors and combines. Ten-year property includes trees or vines bearing fruits and nuts, fifteen-year property includes property fences and shrubs, and twenty-year property includes farm buildings. Dairy farmers also have depreciable assets in their cattle.
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