Accelerated Cost Recovery System -ACRS
A taxation system that allows individuals and businesses to write off their revenue-generating assets in a shorter time frame to increase tax deductions.
Accelerated Cost Recovery System Details
In 1981, the US Congress brought the accelerated cost recovery system (ACRS) to life, allowing asset owners to reduce the period they can pay taxes for their depreciating property. If you bought a profitable asset between then and 1986, your taxation for that asset would be calculated based on eight fixed recovery periods set by the IRS.
An asset's value decreases faster than the traditional straight-line method that calculated an asset's value based on usage and lifespan. Usually, revenue-producing assets depreciate in a linear approach whereby the older the asset, the lesser its value. Under the ACRS approach, an income-generating asset can depreciate rapidly based on cost recovery.
To calculate, you estimate the property's capitalized costs and use that to speed up the period before you can write off the asset from taxation. The IRS provides eight recovery periods between three and 19 years, depending on the asset's capitalized cost. To calculate your asset's depreciation based on the ACRS, you multiply the capitalized costs by the tax year percentage.
Hypothetical Example of Accelerated Cost Recovery System
Suppose you bought an asset at $1 million between 1981 and 1986. Using a straight-line depreciation approach, your asset will depreciate by $50,000 every year over 20 years.
If the same asset is placed in the ten-year recovery period depending on the amount you incurred when purchasing it, the depreciation rate per year would be $100,000. With the ACRS approach, your asset gives you more returns annually because of the increased tax deductions.
You can use increased cash flow to offset other debts in your business or grow it.
History of Accelerated Cost Recovery System
In 1971, the Asset Depreciation Range (ADR) system was introduced after-tax analysts advocated for the change from machinery and equipment useful life concept to a capital cost recovery system based on recovery periods. For the next ten years, the depreciation of an asset was based on the straight-line approach depending upon its lifespan and usage.
In 1981, the Economic Recovery Tax Act helped property owners speed up their asset's depreciation based on their capitalized assets and increase their annual tax deductions. This system came to life at a time when the US was trying to revive its economy. Individuals and companies enjoyed more deductions, consequently increasing cash flow.
Proponents of the ACRS approach argued that the shorter depreciation of assets boosted the economy through increased business returns. On the other hand, critics claimed ACRS made false impressions on individuals and businesses. After five years, the government gave in to the criticism and introduced the Modified Accelerated Cost Recovery System (MACRS). The new system used more extended recovery periods allowing more time for taxes to be collected.
Accelerated Cost Recovery System vs. Modified Accelerated Cost Recovery System
In ACRS, the value of profitable assets depreciates according to the cost incurred when purchasing the asset. Only income-generating assets procured between 1981 and 1986 are eligible for this type of asset depreciation calculation.
For the modified accelerated cost recovery system (MACRS), the individual or business can recover their assets' capitalized costs for the first years of their property. After a specified time set by the IRS, the asset's depreciation slows down, and the asset owner pays taxes for a longer time.
MACRS allows rapid depreciation of a tangible asset for the first year to recover the purchasing costs. The slowing depreciation after the specified period brings a balance between the taxman's returns and the asset owner's deductions.