system of depreciation for tax purposes mandated by the Economic Recovery Act (ERA) of 1981 and modified by the Tax Reform Act of 1986. The type of property determines its class. Instead of providing statutory tables, prescribed methods of depreciation are assigned to each class of property. For 3, 5, 7, and 10 year classes, the relevant depreciation method is the 200% declining balance method. For 15 and 20 year property, the appropriate method is the 150% declining balance method switching to the method when it will yield a larger allowance. For residential rental property (27.5 years) and nonresidential real property (31.5 years), the applicable method is the straight-line method. A taxpayer may make an irrevocable election to treat all property in one of the classes under the straight-line method. Property is statutorily placed in one of the classes. The purpose of ACRS is to encourage more capital investment by businesses. It permits a faster recovery of the asset's cost and thus provides larger tax benefits in the earlier years.

accelerated depreciation method in which the amounts recognized in the early periods of an asset's useful life are greater than those recognized in the later periods. The SYD is found by estimating an asset's useful life in years, assigning consecutive numbers to each year, and totaling these numbers. For n years, the short-cut formula for summing these numbers is SYD = n(n + 1)/2. The yearly depreciation is then calculated by multiplying the total depreciable amount for the asset's useful life by a fraction whose numerator is the remaining useful life and whose denominator is the SYD. Thus annual depreciation equals

For example, assume that an asset costs $1000 and has an estimated useful life of five years. The estimated salvage value at the end of the five-year period is $100. The SYD is 5(5 + 1)/2 = 15. The calculations for this example are shown below:

accelerated depreciationmethod in which a constant percentage factor of twice the straight-line rate is multiplied each year by the declining balance of the asset's book value. The straight-line rate is simply the reciprocal of the useful life in years, multiplied by 100. If the useful life is five years, the straight-line rate is 1/5 ¥ 100 = 20%. Therefore, the double declining rate is 40%.

To determine the annual depreciation expense, the asset's book value at the beginning of the period is multiplied by the double declining rate.

For example, assume that the asset costs $1000 and has an estimated useful life of five years. The estimated salvage value at the end of the five-year period is $100. The calculations for this method follow:

Note that in the fifth year depreciation expense is only $30, the amount needed to reduce the asset's book value to the estimated salvage value of $100. An asset is not depreciated below its salvage value. Thus, even though salvage value was ignored in the initial computation, the depreciation in the last year(s) cannot bring the asset's book value to less than the salvage value.

system of depreciation for tax purposes mandated by the Economic Recovery Act (ERA) of 1981 and modified by the Tax Reform Act of 1986. The type of property determines its class. Instead of providing statutory tables, prescribed methods of depreciation are assigned to each class of property. For 3, 5, 7, and 10 year classes, the relevant depreciation method is the 200% declining balance method. For 15 and 20 year property, the appropriate method is the 150% declining balance method switching to the method when it will yield a larger allowance. For residential rental property (27.5 years) and nonresidential real property (31.5 years), the applicable method is the straight-line method. A taxpayer may make an irrevocable election to treat all property in one of the classes under the straight-line method. Property is statutorily placed in one of the classes. The purpose of ACRS is to encourage more capital investment by businesses. It permits a faster recovery of the asset's cost and thus provides larger tax benefits in the earlier years.

method of allocating the cost of an asset over its useful life. It requires a fraction to be computed each year, which is applied against the depreciable amount. The numerator is the number of years left to be depreciated. The denominator is the sum of the years' digits of the depreciable life. The formula for the denominator is

where N is the depreciable life. See also accelerated depreciation. For example, an automobile used in business costs $10,000 and has a four-year depreciable life. Sum-of-the-years'-digits depreciation results in the deductions shown below:

method of accelerated depreciation where a percentage rate of depreciation is applied to the undepreciated balance, not to the original cost.