Accelerated Cost Recovery – Definition

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Accelerated Cost Recovery System Definition

Accelerated Cost Recovery System, or ACRS, is an accounting method for depreciating assets  When using ACRS, a company assigns each asset an expected class life. The class life is the period over which a company will depreciate a particular asset. During each asset’s class life, the company depreciates the cost of the asset by a specific percentage annually. Usually, the curved depreciation rate is higher in the first few years of the life class and reduces over time. ACRS curved depreciation is what makes it different from traditional, flat-rate depreciation methods that amortize asset costs at the same rate, year over year.

A Little More on What is the Accelerated Cost Recovery System

The Tax Reform Act of 1986 made it mandatory that companies calculate asset depreciation in their accounting systems. Prior to the advent of ACRS, businesses assets were depreciate using a simple linear depreciation system. Many companies favor the ACRS method of depreciation because it more accurately reflects actual asset depreciation.

The ACRS system is flexible. Companies don’t have to maintain the same depreciation rate across all of their assets. The method permits companies to divide their various properties into asset classes. Each asset class can be depreciated differently, giving businesses more flexibility with cost write-offs. Companies that practice this type of accounting system maintain tables of each property class that include a description of the property class, year of amortization, any other relevant information for accountants referencing the material.

Here’s a step by step walkthrough of depreciating an asset under an ACRS accounting system. First, business accountants classify property as a particular asset class. Next, the accountant references the asset class depreciation tables mentioned in the previous paragraph. There, the accountant will find the appropriate depreciation rate and apply it to the property in question. The amount depreciated will be balanced against the company’s other income tax categories. Accountants often refer to accelerated cost recovery systems as loaded amortization systems, because the rate of depreciation is weighted towards the front of the class life. ACRS is favored by most businesses because of the tax flexibility the system offers. A loaded amortization method allows businesses to more accurately document the real-life depreciation of different asset classes.

Academic Research for Accelerated Cost Recovery System

•    Why taxes matter: Reagan’s accelerated cost recovery system and the US trade deficit, Sinn, H. W. (1985). Economic Policy, 1(1), 239-247.  In 1981, ACRS was introduced to business accounting. The system gave businesses the ability to write off asset costs quicker than was previously possible. When ACRS was first introduced, economists speculate that it was a catalyst for a massive inflow of capital investment into the U.S. This paper proposes that the implementation of ACRS in the early 1980s significantly contributed to several major macroeconomic trends of the mid-80s, including a strong US dollar, a stock market boom, and a US trade deficit. Further, the writer states that to do away with ACRS accounting would cause the opposite macroeconomic effect.

•    Long-run effects of the accelerated cost recovery system, Fullerton, D., & Kodrzycki, Y. (1981).  This paper examines the effectiveness of U.S. President Ronald Reagan’s Economic Recovery Tax Act of 1981, which laid the groundwork for ACRS accounting systems. The authors use data from 37 different assets in 18 different industries to gauge the effectiveness of the tax plan by comparing the effective corporate tax rate with accelerated depreciation models and investment tax credits factored into the total. Using a dynamic general equilibrium model of the U.S. economy, the study simulates how ACRS affects revenues, investment, and growth in the industries studied. The study concludes that ACRS led to additional welfare gains, but other policies would have been even more beneficial.

Real determinants of corporate leverage, Auerbach, A. J. (1985). In Corporate capital structures in the United States(pp. 301-324). University of Chicago Press.

•    Tax policy and capital allocation, Jorgenson, D. W., & Yun, K. Y. (1986). The Scandinavian Journal of Economics, 355-377.  This paper analyzes the effects of U.S. tax policy on capital allocation efficiency. The study modeled the U.S. economy using an intertemporal general equilibrium model using annual data gathered for the period of 1955-1980. Authors created a detailed model of the U.S. tax law to apply to income from capital. They use corresponding data from alternative tax policies to evaluate the effectiveness of tax reform. The study concludes that dramatic improvement of economic welfare would result from a switch to direct taxation.

A Note on Expensing Versus Depreciating Under the Accelerated Cost Recovery System, Angell, R. J., & Wingler, T. R. (1982). Financial Management (pre-1986), 11(4), 34.

•    The impact of personal taxes on corporate dividend policy and capital structure decisions, Chang, R. P., & Rhee, S. G. (1990).

Capital income taxation and resource allocation, Sinn, H. W. (1987). Capital income taxation and resource allocation. Amsterdam et al.

Predicting stock price responses to tax policy changes, Downs, T. W., & Tehranian, H. (1988). The American Economic Review, 78(5), 1118-1130.

Notes on the tax treatment of structures, Gordon, R. H., Hines Jr, J. R., & Summers, L. H. (1987). In The effects of taxation on capital accumulation (pp. 223-258). University of Chicago Press.

Tax reform impacts on agricultural production and investment decisions, Hanson, G. D., & Bertelsen, D. R. (1987). American Journal of Agricultural Economics, 69(5), 1013-1020.

•    Debt financing and tax status: Tests of the substitution effect and the tax exhaustion hypothesis using firms’ responses to the Economic Recovery Tax Act of 1981, Trezevant, R. (1992).  This study evaluates whether an increase in non-debt tax shields leads to a decrease in leverage. The authors use data that measures the corresponding changes in both investment tax shields and debt tax shield, and they conclude that strong evidence is found that supports the theories laid out in the substitution effect and the tax exhaustion theory.

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