Investment Tax Act of 1981

Investment Tax Act of 1981 - Amends the Internal Revenue Code to allow individuals and corporations a deduction from gross income for a percentage of the cost of recovery property. Defines "recovery property" as depreciable tangible property (equipment or machinery) used in a trade or business or held for the production of income and placed in service after December 31,1980.

Establishes four classes and recovery periods for such property; (1) Class 1, two years; (2) Class 2, four years; (3) Class 3, seven years; and (4) Class 4, ten years. Requires assignment of property to the class which has a recovery period at least 50 percent shorter than its present midpoint useful life under the Asset Depreciation Range (ADR). Permits the taxpayer to elect placement of any item of property in the class with the next longer recovery period than the class to which it would otherwise belong.

Limits the amount of a recovery deduction to the aggregate determined by applying the recovery percentage for each class of property to the balance in the recovery account for such class at the end of the taxable year. Defines the recovery percentage as the percentage (100 percent, 150 percent, or 200 percent) selected by the taxpayer for a class of items, divided by the number of years in the corresponding recovery period. Requires a taxpayer to establish a recovery account for each class of recovery property. Sets forth formulae for additions to and reductions in such account. Excludes from the application of such deduction the following kinds of property: (1) certain livestock; (2) property subject to amortization; (3) property depreciable on a basis other than time; (4) public utility property; (5) oil- or gas-fueled boilers; and (6) property used predominantly outside the United States.

Treats qualified progress expenditures, for purposes of the recovery deduction, as property placed in service.

Increases from 20 percent to 30 percent the ADR variance from class life for public utility property.

Revises the applicable percentage for determination of the investment tax credit to make eligible for such credit: (1) 40 percent of the basis of an asset if its useful life is between two and four years (currently, 33 1/3 percent if its useful life is between three and five years); (2) 75 percent of asset basis if its useful life is between four and seven years (currently, 66 2/3 percent if its useful life is between five and seven years); and (3) 100 percent of basis if its useful life is seven years or more (currently, the same). Provides increased applicable percentages for purposes of applying the energy percentage and the employee plan percentage.

Allows election of: (1) 20-year straight line depreciation, with Section 1250 recapture, for structures and structural components; (2) 15-year straight line depreciation, with Section 1250 recapture, for low-income housing; and (3) 15-year declining balance depreciation, with Section 1245 recapture, of certain owner-occupied buildings used for industrial, retail, or catalog distribution purposes. Disallows component depreciation for any taxpayer who makes such election.

Repeals provisions granting small businesses a first-year depreciation allowance for the cost of tangible personal property.

Increases the investment credit carryover (from seven to ten years), the net operating loss carryover for taxable years beginning after December 31, 1981 (to ten years), and the investment tax credit for rehabilitated nonresidential structures (from ten percent to 25 percent).

Repeals provisions disallowing the deduction for real property construction period interest and taxes.