Accelerated cost recovery system |
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Paying
taxes is becoming a routine job for the people of almost all the nation.
The employee of government and the private firms, businessmen and the
people related to other occupation use to converse with the
issue-"How to reduce the rate of amount pay for the tax".
People are becoming. The are buying the things which
are imported or some precious things such as fancy cars, jewelries etc.
For these, they also have to pay taxes. The product we buy, every year by
year lost its value in amount of cash(we used to call it Buy value).This
loosing of value is called Depreciation. In the, word of finance,
Depreciation is: "A non-cash expense that provides a source of
free cash flow. Amount allocated during the period to amortize the cost of
acquiring Long term assets over the useful life of the assets"
Depreciation tax shield is used to for the value of the tax write-off on
depreciation of plant and equipment.
Some time, we can assume that the depreciation of any asset is smooth
or in financial term it is linear. When we purchase any asset we consider
a depreciation rate(some time following some schedule that is market
value, demand, supply and obviously response of people, usages and
some future aspects of that asset.NB:1 illustrate it). Some time we simply
consider some value by our own. But, it is not a good practice. Some time
in certain period of time the asset can go through a vast depreciation or
less depreciation of its value what we have expected. But, in the above
two approaches this vast change in depreciation remain under curtain.
To recover this amount of money we need Accelerated
cost recovery system .Any depreciation method that produces larger
deductions for depreciation in the early years of a project's life. Accelerated
cost recovery system (ACRS), which is a depreciation schedule
allowed for tax purposes, is one such example.
In the other word we can say Schedule of depreciation rates allowed for
tax purposes.
2.How it works:
The Accelerated Cost Recovery System (ACRS) is a method of
depreciating property for tax purposes that 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 their 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.
The Accelerated Cost Recovery System (ACRS For example, office equipment is depreciated with a class
life of seven years, and water vessels are depreciated over ten years.
Each MACRS class has a predetermined schedule, which determines the
percentage of the asset's cost which is depreciated each year (see
tables). Specifically, to calculate the depreciation charge for recovery
tax year six of a Municipal sewage treatment plant that had an original
cost of Rs/- 200000: Example - Determining Class Lives of Personally:
For the current tax year, taxpayer buys and places in
service in the taxpayer's trade or business: office desks, a mini
computer, a heavy-duty truck, a single purpose horticultural structure,
and an over-the-road tractor. Under the Table of Class Lives (reproduced
in the Depreciation Tables section), these properties have class lives (in
years) and are assigned to asset classes as follows:
Under MACRS, the office desks and the single-purpose horticultural structure are 7-year MACRS property; the mini computer and the heavy-duty truck are 5-year property; and the over-the-road tractor is 3-year MACRS property. Four
Factors Necessary to Compute MACRS
The Four Factors Necessary to Compute MACRS Four factors are necessary to determine cost recovery
deductions under the MACRS procedure. These are:
(1) Class life : As ACRS introduce some people said that – "the
system would create a lack of information in entire environment. And, the
system will provide such a scenarios that does not map with real world
because real world have lots of issues that can't be adjust in tax
calculation and recovery method".
It is adoptable that ACRS had some problem and that's why MACRS has
come. Now, It is not satisfying the people need, but also providing
information more that expected which help them to manage business in a
well manner.
Some people expressed concern that the change would spur consumption at
the expense of investment and thus end the period of economic recovery and
growth. Others worried that the frequency of changes would unnecessarily
complicate the tax code. After all, taxpayers were required to use the
useful life method to depreciate property put in service prior to 1981,
the ACRS method for property put in use between 1981 and 1986, and the
MACRS method for property put in use after 1986.
MACRS actually encompasses two different depreciation methods, called
the General Depreciation System (GDS) and the Alternative Depreciation
System (ADS). GDS is used for most types of property. ADS applies only to
certain types of property—that which is used for business purposes 50
percent of the time or less, is used predominantly in the while world, or
is used for tax-exempt purposes, for example—but can also be used if the
taxpayer so chooses.
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