U.S. Tax Laws Allow Accelerated Depreciation

Congress rewrote the Internal Revenue Code in 1954. The new code allowed accelerated depreciation, which influenced capital budgeting techniques and, along with later changes, influenced business investments in new property, plants, and equipment.

Summary of Event

In 1954, President Dwight D. Eisenhower and Secretary of the Treasury George Magoffin Humphrey introduced tax reform to the nation. Their program was designed to encourage economic growth and to create new jobs. The most significant policy of the tax reform perhaps was accelerated depreciation. Prior to 1954, assets were depreciated the same amount each year of their useful lives; this is referred to as the straight-line method of depreciation. The new accelerated depreciation laws allowed businesses to claim more depreciation during the first years of the life of an asset and less in the last years. [kw]U.S. Tax Laws Allow Accelerated Depreciation (Aug. 16, 1954)
[kw]Tax Laws Allow Accelerated Depreciation, U.S. (Aug. 16, 1954)
[kw]Laws Allow Accelerated Depreciation, U.S. Tax (Aug. 16, 1954)
[kw]Depreciation, U.S. Tax Laws Allow Accelerated (Aug. 16, 1954)
Taxation;United States
Internal Revenue Code of 1954
Economic policy;United States
Taxation;United States
Internal Revenue Code of 1954
Economic policy;United States
[g]North America;Aug. 16, 1954: U.S. Tax Laws Allow Accelerated Depreciation[04580]
[g]United States;Aug. 16, 1954: U.S. Tax Laws Allow Accelerated Depreciation[04580]
[c]Laws, acts, and legal history;Aug. 16, 1954: U.S. Tax Laws Allow Accelerated Depreciation[04580]
[c]Economics;Aug. 16, 1954: U.S. Tax Laws Allow Accelerated Depreciation[04580]
[c]Business and labor;Aug. 16, 1954: U.S. Tax Laws Allow Accelerated Depreciation[04580]
[c]Banking and finance;Aug. 16, 1954: U.S. Tax Laws Allow Accelerated Depreciation[04580]
Eisenhower, Dwight D.
[p]Eisenhower, Dwight D.;and business[business]
Humphrey, George Magoffin

On March 15, 1954, President Eisenhower spoke to the nation about his proposed tax program. Later in the year, Secretary of the Treasury Humphrey worked as the president’s liaison to Congress concerning tax reform. In the Annual Report of the Secretary of the Treasury on the State of the Finances, Annual Report of the Secretary of the Treasury on the State of the Finances (government document) Humphrey thoroughly described the benefits of the proposed tax program and accelerated depreciation. He wrote that accelerated depreciation would encourage businesses to invest in equipment because they would realize greater immediate tax savings. The purchases of new equipment in turn would keep the economy modern and cause it to expand. New jobs would be created, and manufacturing with better tools and machinery would provide cheaper, better products for public consumption. Humphrey believed that with the tax reform in place a company would be more inclined to buy a new piece of machinery that would do a job “better and cheaper” and to replace old machinery.

As a result of President Eisenhower’s proposed tax changes, Congress rewrote the Internal Revenue Code, replacing the existing code (which was renamed the Internal Revenue Code of 1939) with the Internal Revenue Code of 1954. The new code became law on August 16, 1954. It included two accelerated methods of depreciation: the declining balance method, providing depreciation at twice the straight-line rate, and the sum-of-the-years’-digits method.

The accelerated methods allow faster “write-offs” of equipment than does the straight-line method, by allowing more depreciation in the earlier years. The higher write-offs in early years reduce reported profits and thus mean tax savings for companies in the early tax years. The 1954 tax code thus provided more incentive for companies to invest in machinery and equipment than did previous tax codes.

The declining balance and the sum-of-the-years’-digits methods compute depreciation in different ways. The declining balance method applies a percentage for depreciation to the book value of an item, which is recalculated each year; thus, the greatest amount of depreciation comes in the first year, when the item has its greatest book value. The sum-of-the-years’-digits method allocates different percentages of the original value of the item in different years. For an item depreciated over five years, for example, the digits one through five would be added to get a sum of the years’ digits of fifteen. In the first year, 5/15 of the total amount of depreciation would be allocated. The second year would be allocated 4/15, and so on to the fifth year getting 1/15 of the depreciation.

In order to determine the useful lives of various pieces of equipment for use in calculating depreciation, the Internal Revenue Service (IRS) recommended use of the publication Bulletin F. Bulletin F (government document) This publication was elective in use and contained an item-by-item listing of assets’ useful lives. Unfortunately, the bulletin estimated long useful lives for equipment, countering President Eisenhower’s hopes for a stimulated economy through increased industry investment. The bulletin failed to reflect the many technological changes that took place during the 1950’s.

Rather than using Bulletin F, many taxpayers determined useful lives on their own. These subjective estimates gave rise to increased controversy between taxpayers and the IRS concerning the depreciable lives of assets. The Treasury Department continued to study depreciation beyond 1954. The study had two objectives: establishing objective standards to minimize IRS-taxpayer controversies and revising (shortening) recommended depreciable lives in order to further stimulate economic growth.

The 1954 tax laws allowing accelerated depreciation were the first of a series of tax laws affecting business investment decisions. Congress discovered that changes in depreciation rules had a large impact on the way the economy performs. In years when economic stimulation was needed, Congress increased depreciation rates and allowed other incentives such as the investment tax credit. In years when economic stimulation was no longer needed, Congress decreased depreciation rates and disallowed other tax incentives.


Accelerated depreciation laws had both immediate and long-term effects on business management. In the 1950’s, the introduction of accelerated depreciation affected capital budgeting decisions. Investment decisions were based upon whether the present value of anticipated after-tax cash flows exceeded out-of-pocket investments. The increased rate of depreciation increased cash flows through tax savings, thus shortening the payback period, or the time that an investment took to pay back its costs. Thus, additional investment in equipment was encouraged by accelerating depreciation.

As a response both to the Treasury Department’s continued study of depreciation and to business complaints concerning Bulletin F, the IRS introduced Revenue Procedure 62-21, titled “Depreciation Guidelines and Rules,” “Depreciation Guidelines and Rules” (government document)[Depreciation Guidelines and Rules] in 1962. Asset lives were shortened and grouped into “classes.” The publication, like Bulletin F, was elective in use. There were more than one hundred classes listed, with life spans designed to match the income produced by an asset.

Also introduced in 1962, by the John F. Kennedy Kennedy, John F.
[p]Kennedy, John F.;taxation administration, was the investment tax credit Investment tax credit . The investment tax credit gave tax savings in addition to accelerated depreciation. The regular investment credit granted a 10 percent credit against taxes for purchases of personal property with a life longer than three years. Thus, a $5,000 qualifying asset generated a $500 tax credit in one year in addition to the normal depreciation deduction. The purpose of the investment tax credit, similar to that of accelerated depreciation, was to stimulate industry investment in property and equipment.

In the 1970’s, the debate over asset lives continued. Many new assets were not covered by the 1962 depreciation tables. Thus, in 1971, the Treasury Department introduced the Class Life Asset Depreciation Range System Class Life Asset Depreciation Range System , referred to as ADR. Assets were separated into classes by industry and assigned a range for the number of years over which they could be depreciated. Taxpayers could select asset lives for tax purposes that fell within that range. The Internal Revenue Service also established a department responsible for updating and supplementing class lives and ranges based on actual industry experience. This was intended to minimize conflicts between the IRS and taxpayers over depreciable lives. Taxpayers, who still had some leeway in determining useful lives, could be challenged by the IRS concerning those decisions. Taxation;United States
Internal Revenue Code of 1954
Economic policy;United States

Further Reading

  • Auster, Rolf. Depreciation Desk Book. Englewood Cliffs, N.J.: Institute for Business Planning, 1980. Explains all aspects of depreciation including useful life, basis, and salvage value. The book also provides numerous tax planning strategies relating to the accounting for, acquisition of, and disposition of assets. A good reference guide for gaining a comprehensive understanding of depreciation.
  • Conable, Barber B. Congress and the Income Tax. Norman: University of Oklahoma Press, 1989. A congressman’s personal account of his experiences with tax law. Conable reviews the role of the various congressional committees, the process of lawmaking, and the major tax acts from 1969 to 1984.
  • Gitman, Lawrence J. Basic Managerial Finance. 3d ed. New York: HarperCollins, 1992. Introductory college textbook about managerial finance. Concepts of the time value of money and capital budgeting are discussed in part 4 and part 5.
  • Kramer, John L., and Sandra S. Kramer. Business Decisions and the Federal Taxing System. New York: Wiley, 1985. A simplified guide, for managers, to the taxation of all types of business entities and the tax implications of various business decisions. No prior knowledge of accounting is required.
  • Pechman, Joseph A. Federal Tax Policy. 5th ed. Washington, D.C.: Brookings Institution, 1987. An economically oriented text explaining the effects of taxation on economic incentives, inflation adjustments for income tax purposes, and other tax policy issues. Prior knowledge of tax law is helpful.
  • Scholes, Myron S., and Mark A. Wolfson. Taxes and Business Strategy. Englewood Cliffs, N.J.: Prentice Hall, 1992. An advanced text concerning tax implications of investment decisions. The book bridges the gap between tax theory and practice by providing insights into the trade-offs between minimizing taxes and achieving business objectives. Difficult to read. Written for tax planners.
  • Sommerfeld, Raynard M. Federal Taxes and Management Decisions. 3d ed. Homewood, Ill.: R. D. Irwin, 1981. Chapter 8 is an excellent discussion of capital budgeting and the effects of tax laws. The remainder of the text explains the various tax consequences attached to certain business transactions. The book is often used as a college text.
  • U.S. Congress. Joint Committee on Taxation. Present Law and Legislative Background Relating to Depreciation and Section 179 Expensing. Washington, D.C.: Author, 2005. Official congressional summary of the history of tax laws regarding depreciation through 2005. Bibliographic references.
  • U.S. Department of the Treasury. Annual Report of the Secretary of the Treasury on the State of the Finances. Washington, D.C.: Government Printing Office, 1954. Includes the Eisenhower administration’s rationale for proposing the accelerated depreciation tax laws. Contains the president’s televised speech to the nation promoting his tax policy and Secretary of the Treasury Humphrey’s writings concerning the accelerated depreciation proposals.

  • West’s Federal Taxation: Comprehensive Volume. St. Paul, Minn.: West Publishing, 1993. Updated yearly. Introductory college text explaining the most current depreciation methods and tax laws. The chapter on depreciation is written to teach students the basics of tax depreciation. Good source to find the most current depreciation rates.
  • Witte, John F. The Politics and Development of the Federal Income Tax. Madison: University of Wisconsin Press, 1985. An exposition of the history of federal taxation until 1985, with an acute analysis of the politics surrounding tax development. Intermediate-level tax text.

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