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What is an accelerated cost recovery system?
An accelerated cost recovery system, otherwise dubbed ACRS, is a form of rapidly depreciating a property, allowing for deducting more from the property owner’s taxes. In this case, ACRS property is divided into various classes, with each getting a predetermined time period over which it would depreciate. This rule generally applies for property placed in service between 1980 and December 1986.
ACRS is a depreciation system that started following the Economic Recovery Tax Act of 1981. ACRS depreciation depends on recovery periods as predetermined by the IRS rather than useful life.
However, for property placed into service after 1986, ACRS was replaced by the modified accelerated cost recovery system (MACRS).
Under MACRS, only the straight-line method and declining balance method of computing applies. Taxpayers using the declining balance method would change to the straight-line method in a situation where depreciation deductions are optimized.
An accelerated cost recovery system is meant to increase the reported depreciation amounts of a company, thus providing it with a higher tax return. This tax deduction would help the company keep more of the revenue generated by these assets. This means that a company can repay any associated debt more easily and quickly while increasing the bottom line in the process.
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Accelerated cost recovery system example
An accelerated cost recovery system applies to companies hoping to benefit from more revenue generated by their assets.
For instance, suppose a company buys an asset at $10 million. Based on straight-line depreciation, this asset will depreciate by the end of a 20-year period, which technically translates to a depreciation rate of $500,000 per year. If this same asset qualified for depreciation under ACRS over 10 years, the rate of depreciation would steadily increase to $1 million per year.