Legal Definitions - Accelerated Cost Recovery System

The Accelerated Cost Recovery System (ACRS) was a specific tax accounting method used by businesses to deduct the cost of certain assets over time. Instead of spreading out the deduction evenly over the asset's actual economic life, ACRS allowed businesses to recover these costs more quickly by assigning a shorter 'useful life' to the asset for tax purposes. This meant they could claim larger depreciation deductions in the early years of an asset's life, reducing their taxable income sooner.

This system was in effect for property placed into service between 1981 and 1986 and was later replaced by the Modified Accelerated Cost Recovery System (MACRS).

• Example 1: Manufacturing Equipment

  In 1983, a textile manufacturer purchased a new industrial loom for $200,000. Under traditional depreciation rules, this type of machinery might have been depreciated over 15 years. However, using ACRS, the manufacturer could assign the loom a shorter recovery period, perhaps 5 years. This allowed the company to deduct a significantly larger portion of the loom's cost from its taxable income in the first few years of ownership, thereby reducing its tax liability more quickly than if it had used a longer depreciation schedule.

• Example 2: Small Business Office Furniture

  A newly established marketing agency in 1985 invested $25,000 in new office furniture and fixtures. Without ACRS, these items might have been depreciated over 7 to 10 years. With ACRS, the agency could classify this property into a shorter recovery period, such as 5 years. This enabled the agency to claim larger tax deductions for the furniture in the initial years, providing a quicker recovery of its investment and improving its cash flow during its startup phase.

• Example 3: Commercial Real Estate

  An investor acquired a commercial office building in 1982 for $1.5 million. Prior to ACRS, real estate was typically depreciated over a much longer period, often 30 years or more. Under ACRS, the building could be depreciated over a significantly shorter period, such as 15 years. This allowed the investor to claim substantial tax deductions for the building's cost in the early years of ownership, which could offset rental income and reduce overall taxable income more rapidly.