Accelerated Cost Recovery System (ACRS)

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The Accelerated Cost Recovery System (ACRS) is a method of depreciating property for tax purposes; it 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 the assets' 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 changes in tax law 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 ultra rapid 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...

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