We don't tax people on the machine either. That is just your seriously convoluted misunderstanding of what profit is.

If you have $1M in the bank (lets say its post tax money that has been there for a couple years to avoid your confusion with income) and you use it to buy stocks, you don't get taxed on "profit" from investing that money in stocks. You don't get a tax break for investing it either. You only get taxed on the gains when you sell. Or you get to deduct the losses if you made a bad investment.

Change stock to other investments, like land. Still no tax, still no tax break.

Now change it to a machine. Still no tax on your investment, BUT you do get a tax break by getting to depreciate it as if the investment was an expense spread over time. If the machine loses value faster than tax depreciation schedules, you get the extra tax break when you sell. If it loses value slower or gains in value, then you pay capital gains on sale just like any other investment.

Basically the tax code is giving you a TAX BREAK for investing in something that is expected to lose value over time by allowing you to capture that loss sooner without having to wait for the sale. Your belief that you are getting taxed on income is just nonsense from a serious lack of understanding.

I'm neither agreeing nor disagreeing as I'm not smart enough to have a strong opinion. The "engineering-adjacent" brain in my head wishes tax accounting and actual business accounting were more closely aligned - i.e., both tracking reality, and, ideally, less likely to be manipulated.

I will say, however, that I find Charlie Munger's musings on depreciation very interesting.

Google: "charlie munger's views on depreciation" and enjoy the read/watch.

Yes, they do.

You count the residual value of the machine as "income". Only $100K is used to set aside revenue, when it really cost you $1M. So the $900K appears as a phantom profit, the residual value of the machine.

So the rig operator loses $500K the first year and still has to pay taxes on $400K "profit" he didn't really make due to the $900K of value in the machine he can't deduct. He is paying taxes on the machine value, that's crystal clear.


If you spent more than you took in, that's isn't a profit. It is bizarre you feel that isn't true, which is very convoluted.


Stocks don't wear out. Not the same thing.


Machines wear out and are the cost of doing business. They all end up being worth $0 at some point. They are necessary consumables in a business and the business should be taxed on their profits beyond the true cost of the machine.


That is so backwards.

The tax code is saying that my expenses in operating my business, such as having capital equipment, will be devalued and I will pay taxes on profits I don't have, and ultimately the true cost of the equipment will never be paid for due to the time value of money.

That is not a BREAK, that is being SCREWED.


You need to explain how the rig operators has $400K in profits the first year. It isn't in his bank account, that is for sure, so where is this "profit" you claim exists?

If you can't explain that, then I'm not the one confused.

Man buys $1M rig, makes $500K revenue using it first year, so he lost $500K, government says he made $400K "profit" and demands he pay taxes on that.

That's' screwed up.

The fact some are convinced this is "right" is furthering the problem, the screwing has become institutionalized to where people think it is a tax break. Sad.

Mike C.

Yes, they do.

You count the residual value of the machine as "income". Only $100K is used to set aside revenue, when it really cost you $1M. So the $900K appears as a phantom profit, the residual value of the machine.

So the rig operator loses $500K the first year and still has to pay taxes on $400K "profit" he didn't really make due to the $900K of value in the machine he can't deduct. He is paying taxes on the machine value, that's crystal clear.


If you spent more than you took in, that's isn't a profit. It is bizarre you feel that isn't true, which is very convoluted.


Stocks don't wear out. Not the same thing.


Machines wear out and are the cost of doing business. They all end up being worth $0 at some point. They are necessary consumables in a business and the business should be taxed on their profits beyond the true cost of the machine.


That is so backwards.

The tax code is saying that my expenses in operating my business, such as having capital equipment, will be devalued and I will pay taxes on profits I don't have, and ultimately the true cost of the equipment will never be paid for due to the time value of money.

That is not a BREAK, that is being SCREWED.


You need to explain how the rig operators has $400K in profits the first year. It isn't in his bank account, that is for sure, so where is this "profit" you claim exists?

If you can't explain that, then I'm not the one confused.

Man buys $1M rig, makes $500K revenue using it first year, so he lost $500K, government says he made $400K "profit" and demands he pay taxes on that.

That's' screwed up.

The fact some are convinced this is "right" is furthering the problem, the screwing has become institutionalized to where people think it is a tax break. Sad.

Mike C.

a CEO is interviewing CFO candidates. He asks each one this question: “How much is 2+2?” The candidate who got the job answered, “How much do you want it to be?”

The basic disconnect here appears to me to be the difference between cash and profit and perhaps also a difference between cash accounting and accrual accounting.

Oh, I think Mike knows full well what he’s talking about. Being totally invested in GAAP, widely-accepted managerial accounting principles, cost accounting, etc., just because they’re the norm doesn’t mean the basic principles Mike is espousing are incorrect or even ignorant as you seem to suggest. It’s all just a matter of accounting practices and tax policy, no more, no less.

As an aside, I’m curious why the apparent need for the high-handed approach and berating and even insulting comments. I would note that Mike never reciprocates in kind and, as I posted previously, his comments are not without support among some pretty smart folks.

Mike, myself and others who have liked his posts understand the tax code and GAAP. We're saying it's a screwing for the tax payer. They are still out 100% of the cash it took to "invest" in the depreciating asset and still have to pay taxes with cash we no longer have. We understand it just fine, but we don't agree with it.

We should get full deductibility of the purchase price of the asset on year one and pay taxes on any sales price in the year of the sale. That would align with the actual cash position of the tax payer.

I keep accusing CPA’s of being covert IRS agents… you guys know what I am talking about!

This has been a great discussion. I have learned a lot.

I am no tax expert and by no means a finance expert. But I have had appreciation with my plane so no reason to take depreciation that I will have to pay later. So I depreciate the plane at a normal rate. I know I will sell it at some point and would rather not get hit with a big tax bill later.


Mike

Exactly, different words with different meanings.

Any tax return with a machine that is being depreciated over more than 1 year.

The undepreciated value of the machine was NOT subtracted from revenue, therefore counted as profit, therefore you are paying income tax on the undepreciated basis of the machine that first year.


His loss is $500K. He put in $1M and got $500K back. That's a $500K loss.


They are both dollars spent that you don't have anymore.

The machine is NOT an investment, it doesn't grow in value, it gets consumed over time. It is a business expense.


You aren't enlightening anyone by calling me stupid.

You need to explain where the "profit" is for the rig operator who is $500K in the hole the first year.

Mike C.

I think your strategy is flawed. The only thing it does is basically loan money to the government at 0% interest by delaying the depreciation you could have taken earlier.

If you keep the plane long enough to reach zero basis on your depreciation schedule, then selling the plane will cause the exact same capital gain as the bonus depreciation. You just lacked the benefit of setting off your income earlier with using the full bonus depreciation and getting less valuable deductions later.

If you sell before you reach zero basis, your capital gains are less, but then you also paid more on income in prior years that could have been offset by more aggressive depreciation. Those dollars in prior years are more valuable than now, so you aren't ahead in that game.

It is never a good idea to loan money to the government at 0% interest.

Mike C.

Mike, if you can’t understand that there is a difference between cash-flow and profit, you can’t understand period.

I understand the rig owner lost $500K the first year and is being asked to pay taxes on a phantom $400K profit because he is being taxed on $900K of residual rig value.

You can use all the terminology you want, but that doesn't increase the numbers in the bank account. I keep asking you where the $400K "profit" is and you keep not answering, because you know it doesn't exist.

Depreciation screws the taxpayer. That's crystal clear. The taxpayer ends up paying taxes on phantom profits they don't have, and the future deductions are less value than the true cost of the machine.

Mike C.

I think your strategy is flawed. The only thing it does is basically loan money to the government at 0% interest by delaying the depreciation you could have taken earlier.

If you keep the plane long enough to reach zero basis on your depreciation schedule, then selling the plane will cause the exact same capital gain as the bonus depreciation. You just lacked the benefit of setting off your income earlier with using the full bonus depreciation and getting less valuable deductions later.

If you sell before you reach zero basis, your capital gains are less, but then you also paid more on income in prior years that could have been offset by more aggressive depreciation. Those dollars in prior years are more valuable than now, so you aren't ahead in that game.

It is never a good idea to loan money to the government at 0% interest.

Mike C.