Accelerated Cost Recovery System (ACRS)

What Is the Accelerated Cost Recovery System (ACRS)?

The accelerated cost recovery system (ACRS) is a depreciation method for assets with the goal of providing tax breaks. ACRS was implemented in 1981 by the Internal Revenue Service (IRS) and replaced in 1986 by the modified accelerated cost recovery system (MACRS). It was applicable to all assets purchased in that period.

Understanding the Accelerated Cost Recovery System (ACRS)

The Economic Recovery Tax Act of 1981 included the accelerated cost recovery system (ACRS), which changed the rules for depreciating assets purchased from 1980 to 1986. Rather than depreciating income-generating assets using a straight-line approach based on the lifetime of the asset, ACRS allowed taxpayers to depreciate them on shorter schedules based on cost recovery.

Assets are assigned to one of eight recovery classes under ACRS. The eight classes are between three to nineteen years, depending on the useful life of the asset.

Accelerated depreciation increased the deductions asset owners were able to claim, which the law's proponents believed would accelerate economic growth. The act was put into effect during a recession and increased the cash flows of corporations, which were then used for further investments, growing the business, or paying down debt, all with the intended goal of spurring the economy.

ACRS was modified in 1984, and the Tax Reform Act of 1986 replaced it with the modified accelerated cost recovery system (MACRS). MACRS only accelerates depreciation in the first few years of an asset's life.

Tax Break

The accelerated cost recovery system (ACRS) was intended to work as a tax break for companies. As depreciation qualifies as a tax deduction, the higher the reported depreciation, the lower the taxes a company has to pay. As such, ACRS increased a company's depreciation allowing them to qualify for higher tax deductions, meaning they would pay fewer taxes and hold onto more revenues.

Criticism of the Accelerated Cost Recovery System (ACRS)

The proponents of ACRS believed that it left companies with additional cash that would help grow the economy, critics believed that it created a large disparity between cash flow from operations and earnings. They believed that focusing on cash flows rather than earnings as a sign of a company's financial health was an incorrect measure.

With the implementation of ACRS, the financial community witnessed a large increase in hostile takeovers, where acquiring companies were able to leverage the assets of the company being acquired to finance their takeovers.

It was for these reasons that the accelerated cost recovery system (ACRS) was replaced by the modified accelerated cost recovery system (MACRS). MACRS uses two types of depreciation methods in its calculations: the general depreciation system (GDS) and the alternative depreciation system (ADS). GDS is used more often than ADS.

Example of the Accelerated Cost Recovery System (ACRS)

If a company bought a piece of machinery for $2 million, under the straight-line depreciation method it would depreciate at $100,000 a year if the asset had a depreciable life span of 20 years. If the asset was depreciable under ACRS with an assigned period of 10 years, it would depreciate at $200,000.

In this example, a company would report an annual depreciation of $200,000 to the IRS under ACRS versus $100,000 under straight-line depreciation, allowing for more tax breaks, holding onto more revenue. The company could then use this extra cash for a variety of purposes to better strengthen its business.