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What is the US Tax Reform Act of 1986?

The US Tax Reform Act of 1986 lowers corporate tax rates and provides a simple system for calculating depreciation expense.

The Tax Reform Act of 1986 is United States Federal legislation that made comprehensive changes in the US system of taxation for individuals and businesses. The Act was passed by the US Congress, in October 1986, following a request from President Reagan and the Treasury Department for adjustments to the US tax code that would simplify the code while remaining "revenue neutral" with the code then in place.

The 1986 Act approached revenue neutrality and simplification by

  • Changing the tax rate structure so as to reduce the range of tax rates. The tax rate ceiling of 50% was lowered to 28%, while the minimum rate was raised from 11% to 15%, for instance.
  • Providing incentives for business investment and growth (e.g., taxing capital gains at the same rate as other income).
  • Eliminating or restricting a long and wide-ranging list of deductions, shelters, and loopholes. One result of the Act that is very familiar to most business people, for example, was a tax depreciation system that specifies the allowable depreciation lives of different asset classes (see, for instance, the description Modified Accelerated Cost System in this encyclopedia).

The Tax Reform Act of 1986 is known informally as the "second Reagan tax cut" and officially as Public Law 99-514 (the 514th bill for the 99th US Congress). 

For the rules and application of the Act's depreciation system, see the US Internal Revenue Service Publication 946, "How to Depreciate Property."