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What is an Accelerated Cost Recovery System?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 21 August 2016
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Often referred to as ACRS, accelerated cost recovery systems are essentially a ways to claim early depreciation on new goods, resulting in increased tax deductions for a given calendar year. Here is some background on the development of the accelerated cost recovery system, and why this process can be advantageous for a number of businesses.

The modified ACRS was given life with the Tax Reform Act of 1986 in the United States. The purpose of the act was to create a standard system for depreciation of new purchases that would allow for an orderly system of claiming depreciation that would not vary from one situation to another. The Tax Act established specific depreciation methods for several different classes within the accelerated cost recovery system. Part of this structuring also involved defining what type of equipment was eligible for depreciation in various yearly increments, such as three, five, seven, ten, fifteen, or twenty year classes. At few of the criteria used to classify equipment for depreciation rests upon the type of equipment, the intended use, and the life expectancy of the equipment.

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The use of an accelerated cost recovery system can benefit just about any size business. For example, large textile firms can use the principles of the accelerated cost recovery system in conjunction with their own in house obsolescence procedures when it comes to large and costly machines and machine parts. Telecommunication companies can utilize the accelerated cost recovery system to provide tax breaks that allow them to purchase updated bridging and server equipment. Even a smaller company with limited partnership assets will find that the use of accelerated cost recovery system methods will help the bottom line with an additional tax break on new office equipment.

Employing the concept of an accelerated cost recovery system is not always in the best interests of a company. At the same time, it never hurts to look at the potential and see if it is workable to go ahead and get the most from the tax deduction in the first few years at the expense of not having that deduction in later years. Companies that operate with a consistently larger annual profit may find that the use of ACRS is not really helpful in one calendar year, and prefer to take standard rather than accelerated deductions. For others, the accelerated tax deduction may have a significant impact on the financial health of the company, making it possible to use the deduction to redirect funds into areas that will help improve the financial outlook for the upcoming year.

As a means of assisting businesses to allow for deductions on essential equipment on the front end, the accelerated cost recovery system allows a corporation to get the most financial benefit from the new equipment now rather than later. For companies that operate with a slim profit margin, this can be the difference between remaining profitable and competitive, or falling behind and eventually shutting down.

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