ACCELERATED COST RECOVERY SYSTEM

ACCELERATED COST RECOVERY
SYSTEM

The Accelerated Cost Recovery System (ACRS)
is a method of depreciating property for tax purposes
that 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 their 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 tax law changes 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 ultrarapid
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 nonresidential 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.