Accelerated Cost Recovery System (ACRS)
Accelerated Cost Recovery System (ACRS)
The Accelerated Cost Recovery System (ACRS) is a method of depreciating property for tax purposes; it allows individuals and businesses to write off capitalized assets in an accelerated manner. Adopted by the U.S. Congress in 1981 as part of the Economic Recovery Tax Act, ACRS assigns assets to one of eight recovery classes—ranging from 3 to 19 years—depending on the assets' useful lives. These recovery classes are used as the basis for depreciation of the assets.
The idea behind ACRS was to increase the tax deduction for depreciation of property and thus increase the cash flow available to individuals and businesses for investment. It was put in place during an economic recession and "unleashed a torrential flow of corporate cash," according to Elizabeth Kaplan in Dun's Business Month. In fact, at the time it was enacted, ACRS was expected to add between $50 and $100 billion to the incomes of individuals and businesses over a 10-year period.
Proponents of ACRS claimed that this depreciation method and related changes in tax law led to a huge increase in investment that helped the U.S. economy recover. But other people criticized ACRS for making reported business earnings look better than they actually were. "The dangers of treating depreciation as merely an accounting convention—and not a real economic cost that provides for the eventual replacement of plant and equipment—were exacerbated by ACRS, which allowed companies to take ultra rapid depreciation on capital-intensive assets," Kaplan explained. "By reducing corporate tax bills, ACRS also exaggerated the disparity between cash flow and reported earnings. The cash generated by a company's operations is being hailed as a far more reliable barometer of financial health than the more traditional earnings yardstick, which can be skewed by accounting conventions."
Perhaps the most dangerous trend to grow out of the favorable tax treatment of capitalized assets was a large number of hostile takeovers. "ACRS inadvertently unleashed a potent weapon for corporate raiders who specialize in leveraging the assets of the target company to finance their attacks," Kaplan noted.
Responding to criticism, the U.S. Congress revised the ACRS as part of the 1986 Tax Reform Act. The new depreciation method for tangible property put in use after 1986 is called the Modified Accelerated Cost Recovery System (MACRS). The main difference between ACRS and MACRS is that the latter method uses longer recovery periods and thus reduces the annual depreciation deductions granted for residential and non-residential real estate.
Some people expressed concern that the change would spur consumption at the expense of investment and thus end the period of economic recovery and growth. Others worried that the frequency of changes would unnecessarily complicate the tax code. After all, taxpayers were required to use the "useful life" method to depreciate property put in service prior to 1981, the ACRS method for property put in use between 1981 and 1986, and the MACRS method for property put in use after 1986.
MACRS actually encompasses two different depreciation methods, called the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). GDS is used for most types of property. ADS applies only to certain types of property—that which is used for business purposes 50 percent of the time or less, is used predominantly outside the United States, or is used for tax-exempt purposes, for example—but can also be used if the taxpayer so chooses.
In March 2004, temporary and proposed changes to MACRS were published by the IRS. The changes concern how depreciation is handled for property acquired in one of two very specific ways. Property acquired in a like-kind exchange and/or as a result of an involuntary conversion are to be handled differently if both the relinquished and the replacement property are subject to MARCS in the acquiring taxpayer's hands. The property in question must also have changed hands prior to February 27, 2004. According to Lynn Afeman, in an article discussing these changes in The Tax Adviser "The temporary regulations, fortunately, provide an election out of these rules. However, some taxpayers may make the election simply to avoid complexity, rather than to gain the most advantageous depreciation regime."
see also Depreciation
Afeman, Lynn, and Sarah Staudenraus. "Practical Application of the New MACRS Depreciation Regs." The Tax Adviser. June 2004.
Blumenfrucht, Israel. "Depreciation of Personal Property." Management Accounting. April 1987.
Duncan, William A., and Robert W. Wyndelts. "The Accelerated Cost Recovery System after the Tax Reform Act of 1986." Review of Taxation of Individuals. Summer 1987.
Flynn, Maura P. "Property Located Outside United States Subject to Different Depreciation Rules." The Tax Adviser. August 1992.
"The Future of Depreciation Rules." Nation's Business. February 1986.
Internal Revenue Service. IRS Publication 946: How to Depreciate Property. 2000.
Kaplan, Elizabeth. "Wall Street Zeroes in on Cash Flow." Dun's Business Month. July 1985.
Tandet, Steven N. "Modified Accelerated Cost Recovery System." The Tax Adviser. April 1989.
Hillstrom, Northern Lights
updated by Magee, ECDI