Strategies for managing cost recovery of three- and five-year property placed in service after 1982

Extract: Economic Recovery Tax Act revised computation of depreciation and replaced Additional First Year Depreciation with first year Election to Expense. One of three combinations of cost recovery and expense election will most often maximize present value of tax savings -- 1) accelerated method with maximum expense election, 2) accelerated method with no expense election and 3) straightline method with shortest permissible recovery period and no expense election. Expectation of higher tax rates in future years, high discount rate or expectation of trading the asset before all cost is recovered induce taxpayers to use combinations which accelerate realization of tax savings. Anticipation of early sale encourages taxpayers to use either accelerated method and maximum election to expense or straightline with no expense election. Strategies which maximize present value of tax savings of depreciable assets will continue to be valid notwithstanding the Tax Equity and Fiscal Responsibility Act.