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What is Accelerated Cost Recovery System ?
Accelerated Cost Recovery System (ACRS)
is a method of depreciating property rapidly for tax purposes.
This allows individuals and businesses to write off capitalized
assets in an accelerated manner. It was adopted by the U.S.
Congress in 1981 as part of the Economic Recovery Tax Act. The
ACRS is used for property placed in service after 1980 and
before 1987. It is a means of recovering the cost of property
used in a trade, business or to produce income through
depreciation deductions. You must continue to figure your
depreciation under ACRS if you used a property in service during
this period. The ACRS was intended to increase the tax deduction
for depreciation of property thereby increasing the cash flow
available to individuals and businesses for investment.
Any property placed in service after 1986 will be depreciated
under the Modified Accelerated Cost Recovery System (MACRS). The
MACRS uses longer recovery periods thus reducing the annual
depreciation deductions granted for residential and
nonresidential real estate.
Types of property in ACRS
Recovery Property Property
that is depreciable under ACRS is called recovery property. It
can include new or used and personal property. The property must
be for use in a trade or business or for the production of
income. Recovery property under ACRS must have been placed in
service after 1980 and before 1987. The recovery class of
property determines the recovery period. Generally, the class
life of property places it in a 3-year, 5-year, 10-year,
15-year, 18-year, or 19-year recovery class.
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Nonrecovery
Property You cannot use ACRS for property you placed
in service before 1981 or after 1986. Nonrecovery property
includes:
• Intangible property Intangible property is not depreciated
under ACRS.
• Property depreciated under methods not expressed in a term of
years Certain property depreciated under a method not expressed
in a term of years is not depreciated under ACRS.
• Public utility property Public utility property for which the
taxpayer does not use a normalization method of accounting is
excluded from ACRS. Additions or improvements to ACRS property
after 1986: Any additions or improvements placed in service
after 1986, including any components of a building (plumbing,
wiring, storm windows, etc.) are depreciated using MACRS.
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Features
of ACRS
The key distinguishing features of ACRS are:
• ACRS assigns eight recovery classes ranging from 3 to 19
years. These classes are used as the basis for the depreciation
of the assets.
• The law prescribes fixed percentages to be used for each class
of property. Under ACRS, the prescribed percentages are used to
recover the unadjusted basis of recovery property.
• Shorter recovery periods were used to calculate annual
depreciation.
Calculating the Deduction
You need to know the following to calculate the deductions:
• The unadjusted basis of your recovery property.
• The classes of recovery property.
• The recovery periods.
Unadjusted Basis To
calculate your ACRS deduction, you must multiply the unadjusted
basis in your recovery property by its applicable percentage for
the year. Unadjusted basis is the same amount you would use to
figure gain on a sale but do not take into account any
depreciation taken in earlier years.
Classes of Recovery Property
All recovery property under ACRS falls into one of the following
classes. The class for your property is determined when you
began to depreciate it.
3-Year Property This
includes automobiles, light-duty trucks, and tractor units for
use over-the-road. Race horses over 2 years old and any horses
over 12 years old when placed in service belong to this property
class. The ACRS percentages for 3-year recovery property are:
Recovery Period Percentage for 3-year Property
1st year - 25%
2nd year - 38%
3rd year - 37%
5-Year Property This
includes computers, copiers, and other ofice equipment, such as
furniture and fixtures. It also includes single purpose
agricultural or horticultural structures and petroleum storage
facilities. The ACRS percentages for 5-year recovery property
are: Recovery period Percentage for 5-year Property
1st year - 15%
2nd year - 22%
3rd through 5th year - 21%
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10-Year
Property: This includes certain real estate property
such as theme-park structures and certain public utility
property. Manufactured homes including mobile homes and railroad
tank cars are also 10-year property. The ACRS percentages for
10-year recovery property are: Recovery Period Percentage for 10
year Property
1st year - 8%
2nd year - 14%
3rd year - 12%
4th through 6th year - 10%
7th through 10th year - 9%
15-Year Real Property This
includes all real property placed in service after March 16,
1984 such as buildings other than those designated as 5-year or
10-year property. The percentages for 15-year real property
depend on when you placed the property in service during your
tax year. |
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18-Year Real
Property This includes real property such as buildings,
other than those designated as 5-year, 10-year, 15-year real
property and placed in service after March 15, 1984, and before May
9, 1985. Find the month in your tax year that you placed the
property in service in a trade or business or for the production of
income. Use the percentages listed under that month for each year of
the recovery period.
19-Year Real Property It
includes all real property other than those designated as 5-year,
10-year, 15-year, or 18-year real property and placed in service
after May 8, 1985, and before 1987.
Recovery Periods Each item of
recovery property is assigned to a class of property. The classes of
recovery property establish the recovery periods over which the
unadjusted basis of items in a class is recovered. The classes of
property are: 3-, 5-, 10-, 15-, 18- and 19-year property.
ACRS Deduction in Short Tax Year
For a tax year that is less than 12 months, the ACRS deduction is
prorated on a 12-month basis. Figure the amount of the ACRS
deduction for a short tax year as follows:
• Figure the ACRS deduction for a full year. You figure this by
multiplying the unadjusted basis by the recovery percentage.
• Multiply the ACRS deduction determined for a full tax year by a
fraction (the number of remaining months divided by 12).
Dispositions A disposition is
the permanent withdrawal of property from service by sale, exchange,
retirement, abandonment, or destruction. The disposal of an asset
before the end of its specified recovery period is referred to as an
early disposition and its depreciation deduction in the year depends
on its property class. Typically, there is no depreciation deduction
under ACRS for the tax year in which you dispose of or retire
recovery property except for 15-, 18-, and 19-year real property.
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