Depreciation is not getting the full tax offset of a long lived asset in the year of purchase (assuming there is no 100% bonus depreciation in effect).

For example, you start a company to drill water wells and buy a $1M drill rig. You make $1M revenue in your first year. Great, you broke even, no profit, should be no taxes, right?

Nope, not due to depreciation. The tax law says the drill rig has to be depreciated. Let's say it has a 10 year straight line schedule to make the example simple, so you only get $100K off your taxes this year. Thus you "made" a $900K profit you have to pay taxes on even though you have no money. You may have to pay, say, $300K in taxes.

Then in the next 9 years, you get a $100K offset on your taxes each year, but in the last year, that $100K isn't worth as much as it was when you bought the rig due to inflation (a much bigger deal in recent times). Net result is that you end up getting less tax offset for your purchase than its present value at purchase, maybe only about 70% value. Those extra tax dollars you paid in the first year on no profit were much more valuable than the offset in the 10th year.

When you go to sell the rig after it is fully depreciated, you get tax on the sales price as full income.

Now explain to me how any of this deferred taxes and kept dollars in your pocket. Where are those dollars? It looks like taxes got paid early and you were out more dollars due to depreciation.

Buying a higher priced object to save taxes doesn't work out. You will never be ahead at the end of the game doing that, particularly if the cost of capital is considered.

Mike C.

Why would you assume that? You said it never works for "any tax situation" and then tossed out a tax situation where it's very likely to work.

But let's go ahead assuming that 100% depreciation is gone.

In your drilling rig situation, you're ignoring reality and working in a silo. Who buys with cash - and where did that cash come from? It's more likely that someone made $400K somewhere else, was about to pay 50% in state and federal taxes, and instead decided to buy two $1M rigs for 20% down. The $100k first-year depreciation on each rig allows them to use the full $400k as an investable amount instead of throwing away $200k to the government. The revenue from the investment is doubled.

Using depreciation, you can buy two $1M rigs with $400k of income. Without depreciation, you can buy one.

Depreciation works well when you combine the income from one asset with the depreciation from another. All of your examples look at it as a standalone event.

Being on the payroll doesn't solve it either. Say I want to do a 5 day trip over Christmas. My pro pilot is going to give up their holiday to sit in a hotel for 5 days? Yeah, right.
Mike C.

Not to mention you are making two VERY flawed assumptions, you are assuming that tomorrow’s dollars will be worth more than today’s… and you are assuming the asset will be worth the same amount in the future.

If you didn’t do Bonus Depreciation on your V, you received horrible advice from someone. Your V is ideal, in a few years, engines well passed TBO and assuming a softer market… you won’t have a much of a recapture issue.

I don’t know your tax / income situation, but it is likely that someone just cost you a lot of money.

Where did you get the idea that capital expenditures offset income?

Or maybe you're just suggesting that you think this is the way things *should* work, but we have depreciation instead and you don't like how the law is written.

In either case, depreciation is the law of the land and we all suggest that you learn how to use it correctly and not continue to assume that the entire CPA industry is delusional.

100% depreciation isn't depreciation, it is expensing in effect.


Then that cash cost something in either interest or lost investment growth.


No rig buy:

$400K income, $200K taxes, $200K money in the bank, no long term asset.

Two $1M rigs bought with 20% down loans:

$400K income, all spent on rig down payments. You now owe interest payments on $1.6M of rigs, and the depreciation was worth $200K off first year taxes, so you still owe $100K in taxes on $200K "profit" you don't actually have. Net cash flow first year is -$100K, what you had to come up wit to pay taxes.

Each subsequent year you get $200K in depreciation to offset income, but the present value of that declines with inflation. Ultimately, you never get back the full value of the rigs in depreciation. Plus you had to spend interest on the loan.

When you go to sell the rigs, the windfall from the sale will be income and taxed. Say they sell for $500K each, then that's $500K in pocket, $500K taxes.


You never win that way. You can't end up with more dollars in your pocket by buying a depreciable asset over not doing so.

This all started with the idea buying a $2.5M TBM was somehow less costly than buying a $700K C560V when you factored in taxes. That's a lie, usually told by people who want to sell you $2.5M airplanes.

Mike C.

This subject deserves it's own thread. viewtopic.php?f=7&t=218035&view=unread#unread

Hopefully by having it on a header we can get some tax experts to weigh in.

Now you're assuming the rigs make NO INCOME! What happened to the $2M in income? Your $200k in the bank is making around $4k per year, my two drillings rigs are making near $1.9M after loan servicing.

I swear, having a discussion with you is like trying to staple jello to the wall.

A better example would be choosing between a $1M rig and a $3M rig. This fits the "people need to buy a more expensive airplane to save taxes" theory proposed.

Both rigs produce the same revenue.

Now explain why a $3M results in more money in my pocket in the end?

There is no way that happens. So buying a more expensive airplane can't do the same.

Money spent on depreciable assets never gets fully offset against revenue due to inflation. The depreciation tables have 0% inflation built in as an assumption, which is unrealistic.

Mike C.

No, the better example is the one you originally proposed with the challenge to explain how depreciation kept "more dollars in my pocket." I did just that.

No more jello.

A better example would be choosing between a $1M rig and a $3M rig. This fits the "people need to buy a more expensive airplane to save taxes" theory proposed.

Both rigs produce the same revenue.

Now explain why a $3M results in more money in my pocket in the end?

There is no way that happens. So buying a more expensive airplane can't do the same.

Money spent on depreciable assets never gets fully offset against revenue due to inflation. The depreciation tables have 0% inflation built in as an assumption, which is unrealistic.

Mike C.

Jeez! Shut the heck up! What are you doing to this industry??

Kongress knows that Very Serious People who buy Bizness Aircraft only do things that further our economy with that Very Serious Bizness Asset.

Crap. Someone else posted about not saying everything out loud, fer heaven’s sake!

You can only offset the cost of a plane if is it NOT a toy. It has to be a business asset used at least 50% in business in order to depreciate any of it.

The winning strategy is to to buy a less expensive plane that does the job and invest the saved money in other things, including growing the business itself. Buying a more expensive plane for the sole reason of getting more depreciation is a delusional financial strategy.

Mike C.

You can only offset the cost of a plane if is it NOT a toy. It has to be a business asset used at least 50% in business in order to depreciate any of it.

The winning strategy is to to buy a less expensive plane that does the job and invest the saved money in other things, including growing the business itself. Buying a more expensive plane for the sole reason of getting more depreciation is a delusional financial strategy.

Mike C.

Hi James,

I assume you believe that someone can safely fly a 182 or a Bonanza as a single pilot. So where is the line at which one needs an SIC in order to be safe? Are SETPs safe to fly single pilot? How about METPs? In the jet realm, do you see a difference between an M2 and a Challenger?