AACE INTERNATIONAL PROCESS PRODUCT MANUFACTURING

values or useful lives for equipment. Instead, the law estab-

Using the same example as given above for the double- lishes various property classes and provides for deductions
declining balance method, sum-of-years-digit depreciation calculated as specific percentages of the cost of the asset.
deductions would be as follows: Property classes are listed below:

Undepreciated • Three-year property, which is defined as “property that

Year Investment Depreciation($) balance has a mid-point class life of four years or less, or is used
0 $1,000,000 - $1,000,000 for research and experimentation, or is a race horse more
1 1,000,000 5/15 = 333,333 666,667 than two years old when placed in service, or any other
2 1,000,000 4/15 = 266,667 400,000 horse that is more than 12 years old when placed in serv-
3 1,000,000 3/15 = 200,000 200,000 ice.” This obscure and somewhat confusing-sounding
4 1,000,000 2/15 = 133,333 66,667 definition includes automobiles, light trucks, and short-
5 1,000,000 1/15 = 66,667 0 lived personal property.
Total $1,000,000 • Five-year property, which is defined as property not oth-
erwise defined and which is not
real property. This class includes
The sum-of-years-digits method is expressed mathematically most types of equipment and
as machinery.
• Ten-year property, which is public utility property hav-
2 (n - Y + 1) ing a midpoint class life of more than 18 but not more
Dy = C (equation 10.8) than 25 years. Also included are manufactured homes,
n (n + 1)
railroad tank cars, certain coal utilization property,
theme and amusement park property, and other proper-
ty as defined in the act.
where • Fifteen-year property, which is long-lived public utility
Dy = depreciation in year Y property.
C = depreciable portion of investment • Ten-year and fifteen-year real property classes. The 15-
n = asset life, in years year class consists of real property with a midpoint class
There are numerous other acceptable depreciation methods life in excess of 12.5 years. All other real property falls
including some that are combinations of the above methods. into the 10-year class.
However, the three methods described above are the most
commonly used techniques. Detailed descriptions of each property class may be obtained
upon request from the IRS.
Also as mentioned earlier, if constant maintenance costs are
assumed, no matter which depreciation technique is actually Under the 1981 law, ACRS deductions were phased in on a
used by the company, the straight-line technique should be gradual basis over a period of years. Allowable deductions
generally used for are all preliminary estimates. for personal property are listed in Table 10.4. Fifteen-year
class real property deductions vary from Table 10.4 and are
based in part on the month in which the property was placed
ACCELERATED COST RECOVERY SYSTEM in service. IRS regulations should be consulted to determine
applicable deduction rates.
In 1981 a major revision of tax laws in the U.S. replaced the
pre-existing depreciation systems described above with a It should also be noted that the ACRS requirements place cer-
system known as the accelerated cost recovery system tain limitations on deductions for disposition of property
(ACRS). ACRS is mandatory for all capital assets acquired prior to the end of its class life, and also provide for optional
after 1980 and before 1987 when another system of deprecia- use of alternate percentages based on the straight-line
tion, the modified accelerated cost recovery system method of depreciation.
(MACRS), became mandatory. However, the tax laws specify
that any acquisition must continue to be depreciated on its The logic of the standard ACRS percentages as outlined in
original basis. Thus, since many capital assets have deprecia- Table 10.4 becomes apparent when it is realized that the 1981
ble lives of up to 60 years, the old depreciation systems, to 1984 rates are approximately equal to those for 150 percent
MACRS, and ACRS will coexist and be used by cost profes- declining-balance depreciation with a switch to straight-line
sionals for many years into the future. depreciation in later years. The 1985 rates similarly approxi-
mate 175 percent declining-balance depreciation, and the
Under ACRS, capital assets are not subject to depreciation in rates for 1986 are essentially those for the double-declining-
the customary sense. It is not necessary to estimate salvage balance method, both with a switch to the sum-of-years-dig

10.19