TAX THOSE RICH BASTIDS

[thegreekdog]

So what are tax breaks, subsidies, etc?

greekdog can answer more fully, but one example is that companies can deduct expansion. This one seems to make sense, except that it has often wound up encouraging companies to invest in things that are not truly beneficial or profitable.
Some are seemingly small, but add up, such as various employee expenses. Vehicles, meals, all of that is sometimes deductable. They have curtailed some entertainment deductions, but a lot of other things remain.

Okay, thanks. You gave me the list.

(1) Expansion - I'm not sure what you're talking about here.
(2) Employee expenses - Salaries are deductible. Some benefits are deductible (others aren't).
(3) Vehicles - Vehicles are not deductible as far as I know. Depreciation on the vehicles is deductible however.
(4) Meals - Meals are deductible if provided by the employer to the employee, but I believe there is a cap on the percentage allowed to be deducted (maybe I'm wrong)

[PLAYER57832]

I'll address those paragraphs that had to do with mine:

As to your #1 - The companies that do not pay high taxes in the United States either do not make a lot of income (from a books and records perspective or a tax perspective) or do not have a large presence in the United States.

That last part is the key. A lot of what most people, even what businesses that are less wealthy, wind up making is not "officially income". In short.. you are not really disagreeing with what I am saying, just explaining it another way.

What? First of all, there are rules against excessive excutive compensation (and the deductibility of executive compensation). I 'm not familiar with them, but they exist.

That really doesn't have anything to do with this. It does not negate the fact that looking at the straight tax rate doesn't really represent what is paid in taxes by the wealthy as much as it does what is paid by the lower income individuals, or corporations, which is my whole point.

Second, like I said in another thread - what are companies permitted to deduct that you find objectionable? I want details of what specifically companies are getting away with. What are the tax loopholes. Second of all, the reason that companies like Google don't pay taxes is that their operations are overseas (for tax reasons of course and also because there are other things in the US that cost a lot of money... like salaries... compared to other countries). We've also discussed this before.

Well, you ask me for loopholes and then point to one big one.

I have pointed out a couple of examples.. namely expansion and Boing, etc. However, I am not going to go through the tax code and pull out examples. When I hear virtually every economist talking about this mention various specifics (varying depending on their point of view), then its clear there are problems. The tax code is so complicated it takes a PhD to decipher it and that in and of itself is part of the problem.

One other example is the "hobby" allowance. If you invest in horses, etc you can, depending on how you structure it all, either get an actual income deduction or a lower hobby allowance. Either way, I would certainly rather have 200K and a nice horse farm than a straight 200K. Note.. I do understand a lot of why some of these came about. But again, when it takes years of study just to dig out all of it, that itself is a problem.

So what are tax breaks, subsidies, etc?

Subsidies are taxable income. Tax breaks are taxable income depending upon the jurisdiction. So, if Company X gets a credit in Pennsylvania, it has to take the value of that credit into income for federal purposes (and in all other states).

As a related aside - When I criticize politicians for making the "tax loophole" argument, this is what I'm talking about. Player thinks companies get invalid deductions.

Whether a particular deduction is valid or not is purely a matter of opinion.

Disgree... fine, but don't claim opinion is the same as fact. It isn't.

[Aradhus]

Aradhus thinks companies get tax breaks and subsidies that they don't pay tax on. Not true.

Dunno how you come to that conclusion.

[thegreekdog]

If you're not going to pull examples, why do you believe what you believe? It doesn't make sense to me. I believe there are some deductions and credits that are sketchy (for example, the 100% current year depreciation deduction for certain assets placed in service in 2010), but most of them follow logic.

Let me give you an example...

If you check out a company's financial statements, you will see they make a certain amount of income. This income is the result of taking the revenues and subtracting the expenses. Ideally, taxable income would equal financial statement income. It usually doesn't because there are differences in the tax code and financial statements (which, believe it or not, are almost entire in favor of an increase to taxable income - like the limitation on charitable deductions). So, when a company is permitted to deduct a cost for tax purposes it is because it is an actual expense for book (or financial statement) purposes.

Therefore, from my perspective, a cost that is subtracted from income for financial statement purposes is a valid deduction for tax purposes. Why? Because if you cannot deduct a cost from your taxable income, you're tax base is higher than your actual financial statement income. Hence, what I consider valid is considered valid by probably everyone in the business world. So, I'm probably going to consider this fact. A deduction for tax purposes that corresponds to a cost for financial statement purposes is valid... a fact.

What big loophole did I point to? Salaries? See above.

With respect to hobby allowances - I'm not familiar with federal rules, but for Pennsylania personal income tax purposes, there are "buckets" of income and deductions. One of the buckets is "net profits from the operation of a trade or business." In order to deduct costs for owning horses, it has to go in this bucket. Thus, if your horse costs are more than your horse income from your horse business/hobby, you have a loss. But you don't get to offset your "wage" income (in the "wage" bucket) by the losses you get from your horse business/hobby.

[thegreekdog]

Aradhus thinks companies get tax breaks and subsidies that they don't pay tax on. Not true.

Dunno how you come to that conclusion.

Me neither. Disregard.

[PLAYER57832]

So what are tax breaks, subsidies, etc?

greekdog can answer more fully, but one example is that companies can deduct expansion. This one seems to make sense, except that it has often wound up encouraging companies to invest in things that are not truly beneficial or profitable.
Some are seemingly small, but add up, such as various employee expenses. Vehicles, meals, all of that is sometimes deductable. They have curtailed some entertainment deductions, but a lot of other things remain.

Okay, thanks. You gave me the list.

(1) Expansion - I'm not sure what you're talking about here.

If Boing builds another plant, that is an expense they can deduct. One the one hand, it makes sense because that new plant provides jobs, etc. However, when the breaks are great enough that companies invest in expansion for which there is no real need, knowing that the tax break will compensate for the losses (as apparently is the case with some airlines.. will try to dig up the specifics, but Planet Money does not do a good job of recording its stories, unfortunately), then it can be harmful. This is not a blanket "this is bad" it is a case of something that may need tweaking.

Antoher example might fall in research. I am even more hesitate to call this wrong, because even research that seems useless can pay off in unexpected ways. I would say we need more research without binders, not require companies to conduct only specific-purpose research. However, in some cases, the specific purpose may be just wrong. To pull something out of my hat as a pure hypothetical (I don't believe this is happening, just trying to explain what I mean by wrong-purpose type research, in general.. there may not be any wrong research at all, i just entertain the possibility that it happens) let's say that Marsallas shale guys are doing research into how to subvert the radiation indicators at dumps, so they can dump more toxic stuff. Taht would be "bad for us" research. On the other hand, if they are truly reducing the toxicity of the waste, that would be good. The real problem is defining which is which. In general, companies and governments do a piss poor job of defining good versus bad.

(2) Employee expenses - Salaries are deductible. Some benefits are deductible (others aren't).

Yes, uniforms are deductable in the PA, just as an example. That makes some sense when the uniform is required. On the other hand, we all have to wear clothes and uniforms are often cheaper than the "fashionable" clothing essentially required (but not technically required in the tax sense) to work most places. So, it makes sense, but does it really? Why are the uniforms of the local plant workers a deductable expense, but the clothing teachers have to wear not. The teacher's clothing is actually more expensive. And, while you can argue that the teacher clothing can be used outside of school, you can also argue that the plant workers wear their clothing around town and the teacher, in some respects, has to be presentable even when not "technically" "on duty". It all gets down to a matter of perspective.

(3) Vehicles - Vehicles are not deductible as far as I know. Depreciation on the vehicles is deductible however.

A distinction without a real difference. A company buys a vehicle and it is deducted from profit. This does make sense, except that a lot of business owners seem to be working 24/7 .. passing out cards at soccer games, when taking the spouse out to eat, etc. for example. On the other hand, if you drive for work you should be compensated. I am not so much arguing this one is bad, just pointing it out as an example of a deduction.

(4) Meals - Meals are deductible if provided by the employer to the employee, but I believe there is a cap on the percentage allowed to be deducted (maybe I'm wrong)

The cap is relatively new. The entertainment deduction used to be nearly unlimited. Folks still manage to get away with some nice festivities that get billed to companies, however.

These are all "small fry" and just examples I am familiar with directly, from doing my own and my husband's taxes, etc. Overall, I think that while you can "justify" many of the deductions, we would be better off being more honest about expenses and accounts. Too many of these tax breaks indirectly wind up supporting waste and "bad behavior".

That said, I am not saying any of these companies are cheating or being dishonest. I am saying the tax code needs reform. And, I have yet to hear a single economist who doesn't agree with that. They disagree over how it should be changed, but "simplification" is a more or less universal. (up until you get into specifics.. then there is debate).

[thegreekdog]

(1) Boeing building a plant.

The costs associated with the construction of the plant are deductible, yes. But, as I said in the previous post and which you've ignored, the deductibility of these costs reflect the economic reality that Boeing is spending money on constructing a plant. Let's use this example - Boeing has before cost revenues of $100. Their only expense is building a new plant, which costs them $120. For financial statement purposes, Boeing has a financial statement loss of $20. If they are not permitted to deduct the costs of the plant for tax purposes, they are paying tax on $100... that hardly seems fair. There is no "compensation for the losses." Now, let's say they get an incentive from the state government which says they don't have to pay taxes in that particular state for 10 years because the state wants to create jobs. Let's say the plant fails and Boeing has to abandon it. They aren't paying taxes in the state, sure and no jobs have been created. But, Boeing is still losing out on the $120 it spent on the plant. If you, Player, want taxes to reflect economic realities... if this is what you are arguing... I'm telling you, for the most part, taxes reflect economic realities.

(2) Research

There very stringent reporting requirements in order to have the IRS (or state department of revenue) approve incentives, grants, or credits for research and development. Without getting into tax technical issues, companies pay firms like mine hundreds of thousands of dollars to determine what costs are eligible for R&D credits and incentives... not because they want to, but because if they are audited and things are wrong... no more R&D credit or incentive.

(3) Uniforms

Uniforms are deductible if you are required to wear them for your job (or are deductible by the employer if the employer pays for the uniforms). I see no problem with this at all.

(4) Vehicles and Meals

These are two other items regularly audited by the IRS. If the executive, employee, whatever is not using the vehicle for business purposes, the company pays the money back. If the meals are not business related, the company pays the money back.

So, it appears that the deductions you've identified as being unfair are really not unfair on their face. Instead, they are unfair if they are abused (i.e. if the company does not actually pay for the R&D or the company employees don't use the vehicles or phones for business purposes). The federal government will find these abuses, audit them, assess tax, assess interest, and assess penalties. These tax breaks don't "wind up" doing anything. People who abuse these things are going to get caught and pay a whole lot more than the benefit they receive (by paying interest and penalties).

On a personal note - I do not support reform of any tax codes to make them simpler. I would like to keep my job, thank you. Consider the complexity of tax codes "TheGreekDog Full Employment Act."

[PLAYER57832]

If you're not going to pull examples, why do you believe what you believe?

Its sort of a catch-22 in these threads. Stay with generalities and its "where are the specifics". Get into specifics, and we get bogged down in details and away from the general points. That's all.

It doesn't make sense to me. I believe there are some deductions and credits that are sketchy (for example, the 100% current year depreciation deduction for certain assets placed in service in 2010), but most of them follow logic.

Well, then you agree with me. (though perhaps not about specific examples, which is understandable)

But, here is the key point. You can "justify" just about any position, particularly if you look at it within a microcosm, personal experience and impact. I mean, there was justification for building the "bridge to nowhere" from Ketchikan over to the airport. But. was it really best within the framework of all options? I would say "no". The argument with taxes is similar. The question is not "do these do good", the question is "given our limited resources, is this the best place to direct tax breaks?"

Let me give you an example...

If you check out a company's financial statements, you will see they make a certain amount of income. This income is the result of taking the revenues and subtracting the expenses. Ideally, taxable income would equal financial statement income. It usually doesn't because there are differences in the tax code and financial statements (which, believe it or not, are almost entire in favor of an increase to taxable income - like the limitation on charitable deductions). So, when a company is permitted to deduct a cost for tax purposes it is because it is an actual expense for book (or financial statement) purposes.

Yes, but is the definition of "permitted costs" and so forth really what they should be. As an example, why do we even allow deductions for charities? On the one hand, sure, give money to a cause and it helps. However, the number and definitions of "allowable charities" has gotten pretty big and includes a lot of things that are very partisan. When the deduction is for "feeding orphans".. sure, but "saving Nicaraguan endangered species"... is that really something worth giving a US deduction for? Yet, try to limit it and you get into a whole rats nest of just what is and is not OK. At some point, its best to just say "no" to all of it and look at something other than the tax code to promote deductions. (note .. I like charity deductions, but do you see why it gets tricky?)

Therefore, from my perspective, a cost that is subtracted from income for financial statement purposes is a valid deduction for tax purposes. Why? Because if you cannot deduct a cost from your taxable income, you're tax base is higher than your actual financial statement income. Hence, what I consider valid is considered valid by probably everyone in the business world. So, I'm probably going to consider this fact. A deduction for tax purposes that corresponds to a cost for financial statement purposes is valid... a fact.

One other note. "of value to everyone in the business world" does not equate "good overall" or even "good for the country as a whole". That is yet another key difference. Sure, many are, but I say that the entire code needs to be revisited. All deductions seemed to make sense at one point. they would not have been passed into law if they did not. However, at some point, its not just enough to say "sure, I can understand that", you have to say is that particular deduction better than money put elsewhere.
What big loophole did I point to? Salaries? See above.

With respect to hobby allowances - I'm not familiar with federal rules, but for Pennsylania personal income tax purposes, there are "buckets" of income and deductions. One of the buckets is "net profits from the operation of a trade or business." In order to deduct costs for owning horses, it has to go in this bucket. Thus, if your horse costs are more than your horse income from your horse business/hobby, you have a loss. But you don't get to offset your "wage" income (in the "wage" bucket) by the losses you get from your horse business/hobby.

These rules changed a LOT in the past decades, change every year, it seems. However, one reason a lot of attorneys and corporate heads had horse farms was the hobby deduction. I lived in horse country growing up, so used to hear about it a lot. I mentioned it for that reason. But again, the point is not that this or that deduction is bad. The point is that there are just too many and because there are so many deductions, we wind up cutting costs in places that really hurt. I am saying that the whole system needs to be revised. And, I am saying that for all the pain it would cause, a lower, but flatter tax would be better overall.

It would level the playing field and lead to more honest, pure business decisions instead of "i will do this so I can get a tax benefit".

NOTE... at the same time, i think some taxes need to be added, taxes to pay more for externalities. I would rather have a very low base tax, plus added specific taxes keyed to things like use of resources, pollution, subsidies for employees, etc.

[thegreekdog]

I don't think you're understanding. Or else you're agreeing with me without admitting you're agreeing with me.

The main point that you must understand is that when Boeing builds a facility, they incur a cost that has an impact on their earnings... their financial statement... they have less income than they would have had had they not built the facility. I think taxable income should reflect what is on a financial statement.

If you don't believe these costs should be deductible, than you're putting the tax burden on a company that has less earnings because they incurred this cost. And that will definitely stagnate any growth at all. Alternatively, you could revise the Generally Accepted Accounting Principles and say that building a facility is not actually a cost. I'm not sure anyone is going for that.

So, you see, tax deductions that reflect actual costs should remain deductible. These are not "tax loopholes." These are not "subsidies" to companies. These are honest costs that companies incur and they should not pay tax on income they don't have because of the costs.

Finally, it's not a Catch-22. The problem is that the general public sees companies like Boeing or Google and see that they aren't paying any taxes and they are like, "What the hell?" And then they see politicians talking about "tax breaks for the rich" and "tax loopholes." And then they see these evil corporations moving to Ireland and India and China. And then they say, "These companies aren't even paying taxes and they're leaving? Why? This is ridiculous. Make them pay!"

I cannot speak with authority on a lot of things (NFL football, law school, comic books maybe), but I can speak with authority on taxes. I'm telling you that not only does the general public not understand the tax burden on corporations, but they are being fed so much disinformation that they are completely and utterly misled on the subject.

[PLAYER57832]

(1) Boeing building a plant.

The costs associated with the construction of the plant are deductible, yes. But, as I said in the previous post and which you've ignored, the deductibility of these costs reflect the economic reality that Boeing is spending money on constructing a plant. .... if this is what you are arguing... I'm telling you, for the most part, taxes reflect economic realities.

I understand and partially agree. I am saying that many economist disagree with you on that last part always being true. I said Boeing, but I think it was actually American that was buying extra planes from Boeing (but at this point I would not swear to either detail). I will try to find the actual article.

(2) Research

There very stringent reporting requirements in order to have the IRS (or state department of revenue) approve incentives, grants, or credits for research and development. Without getting into tax technical issues, companies pay firms like mine hundreds of thousands of dollars to determine what costs are eligible for R&D credits and incentives... not because they want to, but because if they are audited and things are wrong... no more R&D credit or incentive.

Yes, again, I understand. The question is just whether the criteria are what they should be. Again, a lot of times things make sense when passed, but not now. I can say for sure this is true in regards to mining and so forth. The whole reason companies are allowed to mine without regard to who lives above and so forth is because of outdated laws that only saw benefit from taking minerals and did not consider impacts above to be as long term or as negative as we now know them to be.

(3) Uniforms

Uniforms are deductible if you are required to wear them for your job (or are deductible by the employer if the employer pays for the uniforms). I see no problem with this at all.

I believe I explained. yes, it makes sense, but... does it really? That is a matter of opinion. It doesn't seem you actually read my arguments there. My main point is that these are not cut and dry "this is good" cuts. They ALL can be good if seen from a certain perspective or not so good. (this is a small cost by-the-way, but it illustrates the debate)

(4) Vehicles and Meals

These are two other items regularly audited by the IRS. If the executive, employee, whatever is not using the vehicle for business purposes, the company pays the money back. If the meals are not business related, the company pays the money back.

So, it appears that the deductions you've identified as being unfair are really not unfair on their face.

No, you are missing the whole point. Talking about "fair" and "unfair" is a distortion. In all the cases, it depends on who you are and your perspective. Also, there is no sum of zero here. Unless a tax specifically generates more money for the taxpayers than the deduction given, it is a net cost. Its a triage situation. Do we stop the blood flow or cure the poison? The question is not are these deductions justifiable or reasonable from a certain perspective. The question is do they benefit the economy, the american public as a whole or only specific individuals over and above the rest. And.. it is a debate we need to have (not you and I , no).

On a personal note - I do not support reform of any tax codes to make them simpler. I would like to keep my job, thank you. Consider the complexity of tax codes "TheGreekDog Full Employment Act."

LOL

yet another reason I did not want to debate this with you. Few people are enthusiastic about working themselves out of jobs.

[PLAYER57832]

I don't think you're understanding. Or else you're agreeing with me without admitting you're agreeing with me.
.

Read my next answer. I think we are playing some "catch up with the last post" and that is complicating things.

[thegreekdog]

You can debate with me, I'm fine with that. But I'm talking about tax rules and you seem to be talking about people violating tax rules or violating environmental regulations to justify saying the tax rules are unfair in favor of corporations. We're arguing different things.

[PLAYER57832]

You can debate with me, I'm fine with that. But I'm talking about tax rules and you seem to be talking about people violating tax rules or violating environmental regulations to justify saying the tax rules are unfair in favor of corporations. We're arguing different things.

No, I am not talking about violations at all. I am talking about the fundamental way the tax code is structured. In short, it is relatively easy to get deductions passed. They make sense, they are popular. However, in terms of the overall picture, is that really the most effective use of money?

Bottom line. If a particular tax generates money, then it is beneficial to us all. If not, then it is not necessarily beneficial.

[thegreekdog]

You can debate with me, I'm fine with that. But I'm talking about tax rules and you seem to be talking about people violating tax rules or violating environmental regulations to justify saying the tax rules are unfair in favor of corporations. We're arguing different things.

No, I am not talking about violations at all. I am talking about the fundamental way the tax code is structured. In short, it is relatively easy to get deductions passed. They make sense, they are popular. However, in terms of the overall picture, is that really the most effective use of money?

Bottom line. If a particular tax generates money, then it is beneficial to us all. If not, then it is not necessarily beneficial.

It is not relatively easy to get deductions passed... they are weighed and measured to determine the overall economic benefit. For example, the 100% current year depreciation deduction was determined to be beneficial to the economy by our Congress and president (current I might add).

Further, the deductions make sense... fundamentally. If a company incurs a cost it should be permitted to deduct the cost.

[Timminz]

The main point that you must understand is that when Boeing builds a facility, they incur a cost that has an impact on their earnings... their financial statement... they have less income

It's not really a cost, overall. It's just a transfer of assets. From cash (or whatever), into "plants, property and equipment". Of course, there would likely be aspects of opening a new facility that were definitely expense-able (and validly so), but mostly it would just be long-term investment, which, if companies were allowed to expense the full price they paid, in the year it was built, would likely encourage some irresponsible growth.

[BigBallinStalin]

(3) Uniforms

Uniforms are deductible if you are required to wear them for your job (or are deductible by the employer if the employer pays for the uniforms). I see no problem with this at all.

I believe I explained. yes, it makes sense, but... does it really? That is a matter of opinion. It doesn't seem you actually read my arguments there. My main point is that these are not cut and dry "this is good" cuts. They ALL can be good if seen from a certain perspective or not so good. (this is a small cost by-the-way, but it illustrates the debate)

Well, technically, I'm required by law to wear clothes in public, and since I have to pay for my "uniform," I should be able to deduct such costs from my taxes.

C'MON, TGD, I need you to help me out with my taxes on this one! I'm offering some broken speakers, (20 years old, computer speakers), an unfashionable beanie cap, and a grab bag of clothes for charity.

[thegreekdog]

The main point that you must understand is that when Boeing builds a facility, they incur a cost that has an impact on their earnings... their financial statement... they have less income

It's not really a cost, overall. It's just a transfer of assets. From cash (or whatever), into "plants, property and equipment". Of course, there would likely be aspects of opening a new facility that were definitely expense-able (and validly so), but mostly it would just be long-term investment, which, if companies were allowed to expense the full price they paid, in the year it was built, would likely encourage some irresponsible growth.

If it's a long-term investment, the company should presumably earn income from the plant in the future and thus pay income tax on that income.

[PLAYER57832]

(3) Uniforms

Uniforms are deductible if you are required to wear them for your job (or are deductible by the employer if the employer pays for the uniforms). I see no problem with this at all.

I believe I explained. yes, it makes sense, but... does it really? That is a matter of opinion. It doesn't seem you actually read my arguments there. My main point is that these are not cut and dry "this is good" cuts. They ALL can be good if seen from a certain perspective or not so good. (this is a small cost by-the-way, but it illustrates the debate)

Well, technically, I'm required by law to wear clothes in public, and since I have to pay for my "uniform," I should be able to deduct such costs from my taxes.

exactly.... In joking, you help make the point. When you add in that many uniforms are actually cheaper than "standard" clothing, is this incentive really needed?

You can argue that if the company itself provides the clothing, they should be able to deduct it, but the truth is that providing clothing is just another form of compensation. If they want to provide clothes instead of additional salary, fine, but should we help pay for those uniforms? (and remember, the "forced to buy them" is rather mute because we all have to buy clothes). I could see allowing individuals who are fired, etc after a short time (less than a full season, less than a year, for example) be allowed to deduct the cost, but even that is debatable.

[Timminz]

The main point that you must understand is that when Boeing builds a facility, they incur a cost that has an impact on their earnings... their financial statement... they have less income

It's not really a cost, overall. It's just a transfer of assets. From cash (or whatever), into "plants, property and equipment". Of course, there would likely be aspects of opening a new facility that were definitely expense-able (and validly so), but mostly it would just be long-term investment, which, if companies were allowed to expense the full price they paid, in the year it was built, would likely encourage some irresponsible growth.

If it's a long-term investment, the company should presumably earn income from the plant in the future and thus pay income tax on that income.

Correct. And that plant will sit on their balance sheet as an asset. It's a reduction in cash-flow, but not income. Something they invest their profits into, not something that affects their profits (in the immediate sense). The only gain or loss associated with the plant, would (or should, I guess) be reflected if, and when they sell the plant, and that amount would be the difference between what they paid for it initially, and what they sold it for in the end (likely a gain).

If what you're saying is the way it goes (and I have every faith that you know what you're talking about), then, in the case of selling a building (or whatever), would the entire sale price go straight into net income?

[thegreekdog]

The main point that you must understand is that when Boeing builds a facility, they incur a cost that has an impact on their earnings... their financial statement... they have less income

It's not really a cost, overall. It's just a transfer of assets. From cash (or whatever), into "plants, property and equipment". Of course, there would likely be aspects of opening a new facility that were definitely expense-able (and validly so), but mostly it would just be long-term investment, which, if companies were allowed to expense the full price they paid, in the year it was built, would likely encourage some irresponsible growth.

If it's a long-term investment, the company should presumably earn income from the plant in the future and thus pay income tax on that income.

Correct. And that plant will sit on their balance sheet as an asset. It's a reduction in cash-flow, but not income. Something they invest their profits into, not something that affects their profits (in the immediate sense). The only gain or loss associated with the plant, would (or should, I guess) be reflected if, and when they sell the plant, and that amount would be the difference between what they paid for it initially, and what they sold it for in the end (likely a gain).

If what you're saying is the way it goes (and I have every faith that you know what you're talking about), then, in the case of selling a building (or whatever), would the entire sale price go straight into net income?

No. You subtract the basis in the property, which is generally cost less depreciation.

So, in 2001 I build a plant for $500 (this is the cost basis). If I immediately sell the plant for $600, I have a $100 taxable gain. If I immediately sell the plant for $400, I have a $100 taxable loss.

If I depreciate the plant each year from 2001 to 2010 until the basis in the plant is $10, if I sell the plant in 2010 for $600, I have a $590 taxable gain. If I sell the plant in 2010 for $400, I have a $390 taxable gain.

So, short answer - no, the entire sales price does not go into income unless the building has no basis.

[Timminz]

Right, so they've essentially been able to write-off the cost of building the thing twice. Once, when they use the deduction in the year it's built, and then again, either incrementally, as it depreciates, or at the point when they sell it (or more likely, a combination of the two).

Is there something I'm overlooking here?

[thegreekdog]

Right, so they've essentially been able to write-off the cost of building the thing twice. Once, when they use the deduction in the year it's built, and then again, either incrementally, as it depreciates, or at the point when they sell it (or more likely, a combination of the two).

Is there something I'm overlooking here?

Yes, you're assuming that a depreciated building will retain its value. The supposed reason for depreciation as a deduction both for book purposes and tax purposes is because a building (or tangible personal property) does not retain its original value over the course of time. Therefore, at least theoretically (I'm not sure how it works in practice), a building that is 50 years old is less valuable than a building that is 20 years old or 10 years old. Therefore, the sales price is likely much less for a 50 year old building than a brand new building. Hence depreciation.

[Timminz]

Right, so they've essentially been able to write-off the cost of building the thing twice. Once, when they use the deduction in the year it's built, and then again, either incrementally, as it depreciates, or at the point when they sell it (or more likely, a combination of the two).

Is there something I'm overlooking here?

Yes, you're assuming that a depreciated building will retain its value. The supposed reason for depreciation as a deduction both for book purposes and tax purposes is because a building (or tangible personal property) does not retain its original value over the course of time. Therefore, at least theoretically (I'm not sure how it works in practice), a building that is 50 years old is less valuable than a building that is 20 years old or 10 years old. Therefore, the sales price is likely much less for a 50 year old building than a brand new building. Hence depreciation.

No, I'm definitely not assuming that. Depreciation is a real expense, and I have no issues with that. Things lose value over time, and can appropriately be written-off as an expense. The problem I see, is allowing a deduction, up-front, for the entire cost of a long-term investment. It allows double-counting of the cost. It's either an expense (deduction) up-front (and pure profit if and when it's sold), or it can be written off over the useful life of the asset. The way I'm understanding you, it can be both, and that's kinda ridiculous.

[thegreekdog]

Right, so they've essentially been able to write-off the cost of building the thing twice. Once, when they use the deduction in the year it's built, and then again, either incrementally, as it depreciates, or at the point when they sell it (or more likely, a combination of the two).

Is there something I'm overlooking here?

Yes, you're assuming that a depreciated building will retain its value. The supposed reason for depreciation as a deduction both for book purposes and tax purposes is because a building (or tangible personal property) does not retain its original value over the course of time. Therefore, at least theoretically (I'm not sure how it works in practice), a building that is 50 years old is less valuable than a building that is 20 years old or 10 years old. Therefore, the sales price is likely much less for a 50 year old building than a brand new building. Hence depreciation.

No, I'm definitely not assuming that. Depreciation is a real expense, and I have no issues with that. Things lose value over time, and can appropriately be written-off as an expense. The problem I see, is allowing a deduction, up-front, for the entire cost of a long-term investment. It allows double-counting of the cost. It's either an expense (deduction) up-front (and pure profit if and when it's sold), or it can be written off over the useful life of the asset. The way I'm understanding you, it can be both, and that's kinda ridiculous.

I have to think about it (or call in a life-line). I'm either getting it wrong or there is a double deduction (in which case I agree with you). I'm trying to think about whether costs of construction are deductible or not for financial statement purposes.

[PLAYER57832]

greekdog. New day, new try.

First, you seem to think I am talking about cheating on taxes. I am not, I am criticizing the fundamental way we construct corporate taxes. And yes, it would impact your profession, but (without minimizing the effort), I am afraid that keeping attorneys hired is not a good reason to keep the tax code complicated. On a serious note, someone as obviously intelligent as you should be able to moveinto a related field with some moderate effort.

Anyway, begin from the basic. Tying corporate and even individual taxes to profits is part of the problem. We have to have a scaled system, because, well, people making 20K a year plain cannot provide enough taxes for our government to function. But, to scale it so tightly to income has the exact negative impact we see. Suddenly, everyone wants to exclude as much as possible of what they make from being "true profit". I have heard more than a few economists refer to figuring out the tax code as almost a "game". A very expensive "game" that itself, apart from other profit and loss indicators, can drive the operations of very big companies in particular.

I understand the justifications. But, the bottom line is that taxes are to pay for services. Using it to manipulate the economy in the way our tax code does is harmful. I hear cries about "command economies". Well, the truth is we HAVE a "command economy". Except the "commanders" are not the political leaders (they implement the demands of the others, but are not the designers themselves). the "commanders" are the heads of industry. You can argue that this is what a market economy means, but I disagree. They are interfering with the market in ways to benefit themselves, not the society as a whole.


Anyhow, my point is that the manipulations, the "commands from the top" should be limited to situations where the market cannot function or actually operates counter to the public interest. [ tangent/brief explanation --- One example is natural resources. It is not truly in the future public's interest to eliminate all forest and agricultural land, yet... that is serious risk when farmers can sell their land and make 1000 times what they can in their lifetime farming. A different example is defense. We all need it, but how many people would just voluntarily put up extra money for the military -- even if they would, some might favor the navy and others a particular bomber in a way that would just not work. Roads are a third example. We all know we need them, but what makes the system really and truly work is having a uniform system. If left up to individuals, we would have a confused mishmash. ] Taxes should not be used to encourage growth in one area over another outside of what the market dictates, except in very narrow situations. [tangent- -example: such as to maintain a base of "critical industry". We may be past that in steel. US cannot produce steel as cheaply as they can overseas. That might put us in serious jeopardy if we enter another big war it also takes away some of our ability to negotiate effectively with other nations that are steel suppliers]

Taxes should be low and more or less flat within broad income levels. You get to deduct materials used, employee wages and not much else. If you want to provide uniforms, do it because it is a good/cost effective move for you (or just something you want to do). Don't depend upon the tax system to make it a balance into good decision.

One of the FIRST things I would drop is the deduction for medical insurance. Why should employers, who are not the ones using the insurance, be the ones to provide it? It made sense in the 1940's when wages were frozen. It became intrenched because of tax breaks. One of the reasons our insurance system is so horrible is precisely because employers buy insurance and employers are not the ones using it. Their mostivation and incentives are not really and truly to provide good insurace. They can "sweeten" salaries, but that only makes sense because the company gets a tax break. Their real overall incentive is to lower cost. Remove the deduction and employers will no longer offer insurance. Instead, allow EVERYONE to buy insurance at "group rates". (funny, a lot like those "insurance exchanges...)

Some taxes will be added. Taxes should be used to require companies to pay for varied externalities. If you are going to drill on Allegheny forest land, making that land no longer truly available for public use, then you need to compensate the public and compensate us heavily for that priviliage. Even more "crazy", how about paying the future for taking resources no longer avaible to them. (I know that kind of tax will never happen, but it is reasonable).

Pollution should be taxed by rate. Pollute more, pay more. And the rate should be based upon real and true clean up costs and research into prevention, impacts, etc. Part of that requires moving away from a system wher anything anybody does for profit is considered OK unless and until the public goes to the expense, collects the volumes of data necessary to prove harm. Why is it up to me to endure having my kids poisoned, to have to wait until they and neighbor kids get all kinds of medical complications, then have to hire an attorney to actually prove cause before a company can be required to do anything to either limit production, clean up their mess or do anything at all. Far too often by the time damage is proven, companies are not even around, even when cleanup and repair are possible. (I mean, since when does any amount of money truly "compensate" a parent for having their child poisoned because it was "not cost effective" or simply not required that a company test their product fully before sending it out into the marketplace).

This WOULD absolutely curtail some business. But, it would primarily curtail businesses that are only pretending to benefit society. Business would hurt, but would adapt. The result would be a more fully sustainable economy and system.

Winning the lottery may seem great. But, most of us don't consider that an effective retirement system. Our current business climate is sort of like that lottery. Great for some people for a while, but in the end, the costs have to be paid. A slow, but steady economy is far better for all of us. Right now, there are way, way, way too many costs that no ohe bothers to count. we don't bother to count them, but future generations will have to do so.

Ironically enough, one of those costs is already here. Years of offering tax breaks to bigwigs without also cutting spending has given us a huge deficite. And, yes, it was the bigwigs who were given the breaks. People on food stamps and welfare not the ones who truly ran up the huge bills we now face.