Economic Recovery Tax Act of 1981

Economic Recovery Tax Act of 1981 - Title I: Individual Tax Rate Cuts - Amends the Internal Revenue Code to reduce individual and estate and trust income tax rates for 1981, 1982, 1983, and 1984. Repeals the 50 percent maximum tax rate on personal service income.

Reduces the alternative minimum tax for taxpayers other than corporations.

Title II: Incentives for Plant, Equipment, and Real Property - Amends the Internal Revenue Code to revise the method for determining useful lives of business assets for purposes of computing allowable depreciation deductions. Replaces the asset depreciation range (ADR) method with a schedule of capital cost recovery periods for three classes of business property.

Establishes cost recovery periods for the following classes of business property: (1) ten-year property, including owner-used buildings and their structural components and certain public utility property; (2) five-year property, including tangible property, and (3) three-year property, including automobiles, light-duty trucks and certain tangible property used in connection with research and experimentation. Excludes from the category of recovery property: (1) property placed in service before January 1, 1981; (2) certain property eligible for amortization; and (3) certain depreciable real property.

Requires the recapture of depreciation amounts and investment tax credit amounts applicable to assets which are sold or otherwise disposed of prior to the expiration of the capital cost recovery period. Revises the treatment of progress expenditure property with respect to the investment tax credit and the allowance for depreciation.

Includes as recovery property property which would have been depreciated using the retirement-replacement-betterment method. Provides special rules for recovery property predominantly used outside of the United States.

Establishes definite useful lives for certain types of real property, (e.g., buildings, low-income housing, owner-occupied industrial and commercial buildings) which are not subject to change by the Internal Revenue Service upon audit.

Allows current depreciation of any qualified progress expenditure property not yet placed in service.

Revises the applicable percentage for determination of the investment tax credit to make eligible for such credit: (1) 100 percent of the basis of ten-year or five-year recovery property; and (2) 60 percent of the basis of three-year recovery property.

Revises the progress expenditure rules to eliminate the useful life requirement for depreciable property being constructed by or for a taxpayer for use in trade or business (qualified progress expenditure property) and to apply to such property the revised percentages for determining the investment tax credit under this Act.

Revises rules for the recapture of tax benefits upon the disposition of property eligible for the investment tax credit. Prescribes recapture percentages for each of the three classes of recovery property.

Limits the amount of the investment tax credit to the amount that the taxpayer has risked.

Disqualifies capital cost recovery property from the allowance for first year depreciation.

Repeals the retirement-replacement-betterment methods of depreciation allowed for certain types of property. Specifies that such property shall be depreciated using a ratable method.

Requires the recapture as ordinary income of excess depreciation from recovery property which is subsequently sold or exchanged.

Exempts accelerated depreciation on real property with a shortened audit-proof life and recovery property from classification as an item of tax preference for purposes of computing the minimum tax.

Sets forth rules for treatment of the depreciation allowance for any recovery property under real property with a shortened audit-proof life in computing the earnings and profits of a corporation.

Extends the carryover period for the net operating loss deduction, the investment tax credit, the work incentive program credit, and the new employee credit.

Sets forth a method of computing the recovery allowance for recovery property and certain real property in the case of certain corporate acquisitions.