Can depreciation be considered a subsidy?

The whole thing about capital expenses is that they last longer than one year – they are investments in major equipment, which is assumed to have a useful life of at least one year or maybe longer. The concept of depreciation is to take into account that the value of even expensive piece of equipment eventually diminishes once the equipment is used for several years.

Account for capital expenditures in the first year is essentially making that purchase an operational expense, not an investment. On the one hand, it reduces taxes for the buyer in the first year, – BUT that deduction doesn’t match reality, which is that it is a piece of equipment that will last a long time. It seems odd to mix the short-term tax benefits of expensing something with the long term corporate goals of investing in equipment for the long haul.

This seems like it will be a short-term bottom line helper (i.e. THIS years taxes are lower) but a long term downer for the company and industry in general, because it appears to diminish the value of investments and long term thinking.

Seems a little shaky to me. Has anyone run the numbers on a national basis?

Profit is what is left after expenses. I believe that you had $1k profit, not $10k. Certain things like cars and capital machinery depreciate over 4 years. That is why some people lease expensive equipment. You can write off the entire lease payment for the year. After 4 years, buy the residual and if it isn’t over a certain amount (I think it is $20k this year), write off the payment.

Yep, and IMO an unreportable subsidy at that. lol
I’m an honest person but there’s a line, and that line is I am happy to give a large slice of the pie to government, but not every little crumb. If they want to audit me for those few extra blueberries, go for it and bring your blueberry sniffing bloodhound cuz those berries are masters of camouflage.. lolol

They can expense up to $500,000 but it drops back to $139,000 if the current laws aren’t extended. It is not a subsidy, it is a tax management tool for businesses. The equipment dealer isn’t going to sell you the equipment and let you pay him over 10 years. He or she wants the full amount of cash up front. How is letting a business manage their business a subsidy? Sometimes the democrats are full of shit.

@Adirondackwannabe

“Sometimes?”

@Almost as often as the Republicans.

@Adirondackwannabe

I’d have to say that they’re about tied. : ))

Thanks for all the good answers.

@elbanditoroso – It seems like being able to expense your capital investment would encourage long term investment. I’m not sure what you see as a downside.

@Ron_C – $10K profit before depreciation expense. $9K after. Do you believe that managing your business to optimize taxes is better than managing it to optimize your business?

@Jaxk For my own business, if I could expense capital investments at a period determined by me, it would lead to more investment in my business, not less. Thus, I son’t follow @elbanditoroso‘s concern that early depreciation would short-circuit long term planning. Still, at a time when we are hemorrhaging red ink, this would further decrease revenues. And since capital equipment really is a multi-year investment rightly expensed over 4 or more years, I can see how it feels like a subsidy.

Our challenge right now is to build back up the health of the middle class. Business isn’t going to be the spark plug to fire up the economy till the middle class has disposable income back in their pockets and can go shopping for the stuff we provide. You can’t fix a demand side problem with supply side solutions.

@ETpro

We’ve disagreed on this before and we still do. Business spending is just as effective as consumer spending.

@Jaxk Bull puckey. Business is NOT going to spend what it takes to drive this economy when nobody can buy what they produce. The proof is in the pudding.

@ETpro

Not sure what pudding your eating but mine has a very bitter taste.

@Jaxk It will be as long as our once strong middle class lies decimated by the real estate fiasco.

Yes, yes yes. I am not sure of the term ‘subsidy’. Tax break, perhaps. Especially here in Norway because we are taxed on the value our company asset holdings, not just earnings. This includes our stock on hand et al. Our ‘company net worth’ is taxed as well as the income. Most of the ships that were once registered here are now registered offshore because of the tax implications. If the government suddenly lets us depreciate our vehicles faster or what ever machinery etc… then our taxes are indeed lowered.

Obviously, when ever you have to capitalise the costs of buying something and write it off over a number of years, you aren’t experiencing the instant gratification to write off like an expense. Depending on the tax situation and the reasons for the company set up, having large capitalised items can look quite good on a balance sheet, especially where resale and borrowing ability is concerned. Capitalised items can be borrowed against, in most cases, so I don’t think it is always a good thing. Your tax return would look nice to you, but your balance sheet would look like crap to an investor or creditor: Age old business dilemma.

In New Zealand, a real subsidy practice was registering for Sales Tax, or GST as it is called there. It is on just about EVERYTHING (very very few exceptions like in the banking transactions and rare stamp duties paid.) You can register and begin doing GST returns immediately when you start up business, so all of your GST paid on supplies, vehicles, even buildings can be claimed back and you can get a big refund your first few months in business, for the low low cost of 85NZD and some paperwork. GST rate was 12.5% so that is a nice bonus if you sell your own car to your business for example, or in one case, we got the GST back for a clients Porshe. He claimed it was the only make of car that fit between his rows of grapes on his vineyard. The IRD accepted the argument and he got the the money back.

That, I would call a subsidy for a start up business or one needing to restructure and going through some tough times. Here in Norway, there is no such thing.

@Jaxk I was once a member of a stock purchasing club and I asked one of the senior members about avoiding some taxes. He told me “I hope we have to pay a lot of taxes, that will mean we made a lot of money”. We did and we did. I certainly didn’t mind because I ended up with many thousands of dollars that I wouldn’t have had otherwise and this was BEFORE the Bush tax cuts!.

@cazzie

We do the same thing here in California. You pay property tax on any land and buildings plus what is called unsecured property tax which is any capital equipment and of course your inventory. If it can be taxed, it is taxed.

@Ron_C

So if I understand correctly, you’re saying making more money is better than making less. Either before or after taxes. I’ll chalk that up to a real pearl of wisdom.

@Jaxk We used to tell our clients there is a line between minimising tax and tax avoidance. In transactions such as stock purchase and sale, the lines are very clear and if you earn money on them, as Joe Public, you will pay tax on them. Paying taxes means you earned money. It’s a good thing.

There are ways corporate tax rules have been all sorts of convoluted so the likes of Mitt Romney and his ilk don’t pay the same percentage as the rest of the smucks who shop at Walmart. Remember some of the early warning bells that went off and were discovered by a middle management accountant at Enron? That had to do with taking HUGE liabilities and losses and sticking them in separate entities. The balance sheets looked ‘too good’ and she was curious where all the depreciated assets and bad investments were going. They managed to over-inflate their net worth as a corporation and their stock price kept climbing.

In the small scale, car rental companies, large contractors started trying the same crap. They would create a holding company for all their assets and then lease them, creating a cost they could write off in their trading arm. Sometimes, enough losses on bad investments can be transferred over to the holding company to minimise any accidental profit there. I think variations on this are still used where it hasn’t been shut down completely.

@cazzie

Just for the record. Paying higher taxes does not mean you earned more money even in your stock club scenario. If I raise the capital Gains tax or the dividend tax you will pay more and earn less. Let’s not manipulate this into some cutesy slogan. As I showed in my example, paying taxes does not necessarily mean you have made a real profit.

There is little doubt that companies can use the tax code to either increase or decrease reported profits. When the bottom line needs to be increased they may store equipment that should be written off or they may write off equipment that should continue to be depreciated, if the bottom line can handle it. The solution (in my opinion) is simpler tax rules. The simpler the tax code the less opportunity for manipulation. Sarbanes-Oxley was touted to be the fix for Enron but all it seems to have done is to extract billions from the economy. Compliance costs have been over a million for each public company in the country. Yet it did nothing to stop the Bernie Madoff’s from running their accounting schemes. It certainly did complicate the tax code however.

I find it interesting that we denigrate the likes of Romney for using the tax code to minimize his taxes yet applaud Buffet for doing the same thing.

@Jaxk I can’t speak for everyone, but I draw the distinction between Romney and Buffet in a different way. Romney made about $42.8 million in 2011 and while it is not possible to calculate his actual tax rate, as certain factors influencing tax rates were not disclosed by him; his actual rate came in at around 14%. Buffet did better than Romney, and also paid closer to 17%. But Romney thinks the Ryan budget is “wonderful” and it proposes he pay NO tax on the $37.3 million he earned from dividends and capital gains. Warren Buffet has asked that the tax rate be made more fair, ensuring that even millionaires and billionaires pay as much as upper middle class workers like his secretary.

The argument that all are free to donate to the IRS is disingenuous deflection from the problem of an unfair and increasingly regressive tax system that is rapidly concentrating all financial wealth in the US in the hands of the top 0.001%. You have claimed, from time to time, to own a supermarket, a gas station and a convenience store. Would you operate ANY of those businesses without posting any prices, just letting customers contribute whatever they saw fit? How long to bankruptcy if you did that?

@ETpro

Maybe if Buffet actually paid the taxes he owed, he wouldn’t have to donate anything. With a $billion still owing in back taxes, I don’t see where he can criticize anyone for not paying thier fair share. Democrats don’t seem to be concerned about the tax rate because they don’t pay the tax anyway. Seems, ever-so-slightly hypocritical.

The prices are posted, you guys just don’t pay them.

@Jaxk Berkshire Hathaway owes back taxes, not Warren Buffet. Am I to believe that corporations are people to the degree that anything the corporation does is synonymous with its CEO?

Blanket statements like ‘Democrats don’t pay the tax anyway’ is BS. I call Troll-like shenanigans. NOT only that, but the rest of the world exists with governments and businesses and double entry accounting and depreciation and they have other political parties and people and businesses pay taxes.

Oh, and does America want to write their very own, individual accounting rules, throwing out basic rules like balance sheets, asset registers, etc. You DON’T expense capital investments because they are assets that add value to the company in their own right as well have substantial resale value on their own. Either you, @Jaxk, have limited understanding of basic accounting principals, or the members of the US government trying to push legislation like this ahead do. I realise people who trade in NOTHING hate it when accountants like me start talking about intrinsic value.

Expensing costs made on capital investment makes NO business sense and will make a balance sheet look like shit for only very short term gain. Adjusting depreciation rules might make more sense, if businesses feel so hard done by with those rules, but throwing the asset register out all together is like throwing the baby out with the bathwater…. No… it is like throwing the baby out when it gets dirty.

@ETpro

The values of the CEO are reflected in the corporation. If Buffet wants us to believe we should be paying higher taxes to expand even more government intrusion, He should at least pay what they already owe. When you apply different rules to yourself than you want for everyone else, that’s called hypocrisy.

@cazzie

This administration has more than it’s fair share of tax problems. If they want to raise taxes on everyone else, they need to get thier own house in order before calling everyone else greedy. If that offends you I can’t help it.

As for the depreciation vs expense, I can understand why an accountant wouldn’t like it. Keeping those depreciation schedules in order gives you guys a lot of business. The reality is expensing the item doesn’t mean it worthless. It only means it has no book value and you’d have to pay tax on any money you get for it.

I am not talking about governments raising taxes, I am referring to accepted standardised practices for accounting. If the US wants to keep listing public companies and have all and sundry around the world investing in them, they had better TIGHTEN the rules and regulations regarding their cowboy antics with Enron and the outright effrontery of the banking industry it presides over.

And you obviously DON’T understand why an accountant (or for that matter a banker, investor, shareholder) wants to see long lived assets registered as opposed to expensing everything because your childish answer of ‘it makes work for us’ is ridiculous.

Why is this issue so important to you to be able to write off capital purchases immediately? What major problem are you facing?

Perhaps you need better accounting advice.

Wow, I’m childish. That hurt me to the quick. Now that I know I’m being childish, I guess I can’t argue any more. What the hell, let me try anyway.

Shorter depreciation schedules are used to promote investment. It is the same issue that Obama railed against for corporate jet owners. It helps to sell more jets. I thought spurring the economy for growth was an issue. I guess Democrats and accountants don’t see it as such.

BTW, I have no personal issue with depreciation. I’ve got depreciation out the wazoo. And that the worst place to have it.

I never said I was against adjusting depreciation schedules, in fact, I think I mentioned that I know there is often need for such adjustments, but you were advocating tossing them out all together. No one is going to invest in businesses that appear to have a lack of working capital, and that is what undervaluing assets does. That isn’t going to help any economy.

@Jaxk I have to agree that the CEO sets the direction and that if Warren Buffet’s going to be a good surrogate to argue for tax reform, he should clean up his own back yard. But what does and doesn’t work in national policy isn’t actually determined by the personalities of any advocate or critic of the policy. Good policy is more like gravity. It works whether you believe in it or not, whether its current advocate is a saint or sordid sinner. And supply-side economics is bad policy because it doesn’t work, not because of the personalities of its prophets or naysayers.

@ETpro

The Buffet rule is another Alternative Minimum Tax scheme. It sounds good to those that are jealous of the rich guys but it will catch much more than just the rich. If you are one of the few left in this country that don’t work for the government, how do you ever save enough to retire. You can go with an IRA but those contributions are limited and when you pull it out, you’re looking at a 50% (between state and federal) tax bite. You can also sock away after tax money, in stocks or maybe you’re business, and the buffet rule will insure you pay about the same. Retirement becomes almost impossible. I don’t give a rats ass about Buffet, but the middle class, that wants to retire on thier own money rather than the government dole, should have an avenue to get there. The Buffet rule strips them of that opportunity.

As a final note, you should look at supply side economics rather than just cursing it. It works better than any other method yet tried. Certainly better than stripping everyone of thier livelihood through excessive taxation.

@Jaxk Please explain how a tax on income above $1 million a year is going to “catch” people with lower income who are already paying a rate higher than the proposed 30%.

I have looked at supply side economics. The only time it may even have worked was when Reagan cut the top tax rate from 70% to 28%. We don’t know what actually worked in that case, because he simultaneously increased the size and spending of the Federal Government. So it is reasonable to expect that Keynes’ theory played a role as well. Unfortunately, while Reagan’s moves did spur job growth and an increase in the GDP, it was not nearly enough to pay for the largess he disbursed. Reagan holds the dubious distinction of being the only President to triple the national debt in just 8 years.

@ETpro

I always have some trouble with your selective statistics and manipulation. Generally if you look a little broader, things become more clear. Back in the old days that you seem to relish with the 94% tax brackets, there were a lot of things going on. First wealth accumulation is not a result of salary but rather capital gains.When we look at Buffet or Jobs and see that they have accumulated massive wealth, it’s not because they’ve gotten huge salaries but rather they’ve amassed huge capital gains. So when you look longingly at those old 94% tax rates and say we did just fine, it’s because we kept the capital gains rates in line. When the income tax reached 94% the capital gains rate for long term investment was only 12.5%. Is there any possibility that had an effect? The average middle class person may invest in a multiple of things, a home, a business, mutual funds, etc. but when they decide to retire these must be cashed in (to retire your investments change from capital accumulation to income). The Buffet rule will hit many of those trying to retire by stripping them of the the income they’ve worked all thier lives to accumulate. The result of selling your mutual funds, home and/or business may easily reach $1 million. But you are not rich. At today’s rate (about 3.5%) a million in retirement savings is only $35,000/year. Not even past the poverty level. The Buffet rule turns that $35,000 into $24,500/yr (1,000,000— 30%=$700,000*3.5%=$24,500). That’s the millionaire/billionaire you’re going after with your Buffet rule.

We should be encouraging people to retire. Leave the workforce and make room for the kids to enter the workforce. Instead we’re blocking retirement. Make people work longer and longer to reach the point where they can retire and still survive. Especially if they can reach retirement without massive assistance from the government.

As for Reagan, I’ve already discussed the capital gains issue. If you look back at FDR he made similar increases in spending and coupled them with tax increases. The result was a prolonged depression where unemployment never got below 16%. Stimulus spending is only good for as long as you continue the massive spending. As soon as you try to slow the spending the economy reverts to where it was. Tax cuts are a more enduring stimulus and the money lost on tax cuts are quickly replaced with increased growth. I know you love to use the Clinton tax hikes as the proof that raising taxes doesn’t hurt. But remember that Clinton also reduced the growth of spending and that didn’t hurt either. When you use those arguments, you have to take the good with the bad.

@Jaxk There is so much wrong with that answer that I doubt there is any sense in carrying on with this discussion. Who said I look “longingly” at the ultra high tax rates of WWII? They were enacted for a very good reason. I’m glad they were, and that we prevailed and Hitler did not. If Hitler had won, a very real possibility, you and I would not exist to have this debate. His master plan called for exterminating all inferior “human species” and populating the whole world with Aryan “Master Race” paragons of perfection.

I’m also very glad the 94% rates weren’t carried on after they had served their purpose. I have said here and in numerous other debates with you that I thought the 70% top rate in force in 1980 needed to be reduced.

I am also aware enough of the tax code to know the difference between taxes on salary and long term capital gains. Once again, I own a business too. I have to deal with the internecine complexity of the IRS rule book.

If you are selling over $1 million of assets, you ARE rich. Far richer than the poor sap retiring on Social Security alone, which more and more Americans are forced to do. Once more, you dredge up all the outliers, but the purpose is to “prove” that we must give ever more money to the wealthiest Americans. It doesn’t trickle down. We’ve run that test for over 30 years now. The top 1% had seen their income rise by 265% and their share of the financial wealth skyrocket from 25% to 42% of all the financial wealth in the nation—and still it isn’t enough. How much must you have before it’s enough? All of it?