Early Assessment of the Capital Cost Recovery System for R and D (Research and Development) Equipment Provided by the Economic Recovery Tax Act of 1981

摘要

The special tax treatment afforded to investors in research and development (R&D) equipment under the Capital Cost Recovery System enacted as part of the Economic Tax Act of 1981 (ERTA) is analyzed. The treatment of R&D equipment under prior law is described and compared to that under the Accelerated Cost Recovery System. In addition, the treatment of R&D equipment is compared to that of other machinery and equipment under the Accelerated Cost Recovery System. The comparisons are based primarily upon the present values of the tax benefits derived under each system at various discount rates. It is concluded that, at reasonable discount rates, R&D equipment is treated only slightly more favorably than under prior law for taxpayers who held the property through its total useful life. However, taxpayers who previously used the Asset Depreciation Range (ADR) System and experienced actual useful lives for R&D equipment much shorter than the assigned ADR life received significant benefits because of changes in the recapture rules for the investment tax credit. Placing R&D equipment in the three-year class instead of the five-year class was found to produce no significant benefit.