Bonus depreciation allows us to live in that world while it exists.

Mike C.

Then you should expense things the year they cost you money. Money out versus money in during the tax year is the true profit. Some fictitious number on a balance sheet, which may have no real bearing on the machines value, isn't a profit.


So you support taxing people who have made no money?

That makes no sense.


That does two bad things.

First, it cause higher taxes to be paid in the first year when the business made no money.

Second, it devalues future deductions so you never recoup the total value of the asset. Your example assumes no inflation or time value of money which is obviously screwing the tax payer.

Depreciation is bad for business.


In the end, it is the same money the taxpayer has to pay.


That's delusional. The driller paid $1M for the machine, and now has to pay taxes on $400K of "profit" he doesn't have.

You can make all the arguments about "proper" accounting and all that other BS, but at the end of the day, the taxpayer is being screwed by depreciation.


That's BS in my book. Depreciation is a tax trick to screw taxpayers.


That has nothing to do with depreciation. The value of the equipment, which is often badly estimated by depreciation schedules, isn't what is being taxed here. You are being taxed on a chart.

Case in point, airplanes certainly don't follow a depreciation value chart at all. So that makes no sense at all to think of depreciation as "value".

In essence, depreciation is taxing people for the unrealized value of the asset. The accounting says they made a "profit", but that "profit" is the illiquid value of the machine that the company hasn't sold yet. If it makes sense to tax that unrealized value, then we should be taxing people holding stocks that have increased in value and treat that like it was actual "profit". It is complete inconsistent to tax the unrealized value of a machine and not the unrealize gain of a stock.

Mike C.

Trying to explain basic finance and accounting to Mike is a hopeless endeavor. Any business buying a drill like his example should hire a new CFO who passed at least one finance class.

It is hopeless because there is no justification for paying taxes on profit you don't have.

Everybody like you that tries to convince my otherwise always end up in the same place: "it is the way accounting is done".

That's a useless answer that is circular. We do it this way because we do it this way. No insight there.


And how would that CFO avoid paying taxes on phantom profits?

If a business wants to count sits assets, sure, the equipment has value on goes on the balance sheet, but the value of the equipment is not "profit" that you should be taxed on.

Bonus depreciation should be the norm for all business equipment.

Mike C

I agree with your last sentence, the rest is just nonsense because you have your own idea of what profits are that doesn't agree with any definition used by any tax authority on the planet or any accounting standards on the planet.

There is no phantom income being taxed. There is investment cash flow that is not allowed to be used as a deduction. The original point you brought up was real estate which is typically an appreciating investment asset, which is why land is not depreciated at all and buildings have long lives. Most of the time you are getting annual unrecognized and untaxed income from appreciation yet you can still deduct a small amount of phantom expense. You only pay tax on the gains when you sell. Thats a good deal for the tax payer, not a bad one. (Except all gains are not indexed for inflation but that is another issue/scam)

FYI, a CFO of a profitable company wouldn't be using more expensive equity to buy the drill. In the real world it is leased or financed with low cost secured debt and the cash flows are more closely aligned with the depreciation, real and tax. If the company is not profitable and cannot borrow, they often use straight line to delay the depreciation to when they will have taxable income.

I don’t think Mike has any issue understanding the law or accounting principles. Looks to me like he just doesn’t agree with them. And I think he’s completely correct in that when it comes to depreciation, the tax structure screws the taxpayer.

When you buy an item today with today’s dollars, but have to expense it out over the next seven or seventeen years it is obvious that you’re paying for it with money that is worth more than the money you can deduct later due to inflation, not to mention the lost opportunity cost.

The fact that the taxing authorities don’t agree doesn’t necessarily point to truth. Not to mention the taxing authorities have nothing to do with it. It’s Congress and they do like your money.

And just imagine what the world would look like if everyone could expense their capital costs at the time they incurred the expense. Could we possibly see a (gigantic) rise in that sort of spending that would lead to more profits, more jobs, more everything good?

Heck, Uncle might even see more money under that scheme.

FYI, a CFO of a profitable company wouldn't be using more expensive equity to buy the drill. In the real world it is leased or financed with low cost secured debt and the cash flows are more closely aligned with the depreciation, real and tax. If the company is not profitable and cannot borrow, they often use straight line to delay the depreciation to when they will have taxable income.

You missed the part about the cost of capital. The CFO is using debt financing because the lenders ask for a much lower rate of return than equity investors, especially for a private company. Equity investors typically expect double digit returns, and usually north of 20% for private company investments, while a secured equipment loan may be 5-7% and the interest is also tax deductible for Federal and state taxes. Lining the cash flows up with tax rules is the cherry on top.

Now flip it around, if you invest in a drill or a building that's financed, should you get to deduct the full value even though the cash has not gone out the door? That would be "phantom" expense. It's perfectly reasonable for tax authorities world wide (not just the US Congress) to not like that.

I would much prefer a simpler tax code that promotes investment, but like everything there are downsides to that as well.

In that scenario, companies would be incentivized to keep investing, even in not so great opportunities, in order to avoid any taxable profits. That sounds kinda good as an investor until you realize they will never pay a dividend or have a stock buyback and the only way to get your investment back would be to sell your shares to someone else who also knows they will never see any distributions from the company. What do you think that would do to the value of your investments?

Sorry, but not more of everything good! We would be better off not taxing business income at all.

You missed the part about the cost of capital. The CFO is using debt financing because the lenders ask for a much lower rate of return than equity investors, especially for a private company. Equity investors typically expect double digit returns, and usually north of 20% for private company investments, while a secured equipment loan may be 5-7% and the interest is also tax deductible for Federal and state taxes. Lining the cash flows up with tax rules is the cherry on top.

Now flip it around, if you invest in a drill or a building that's financed, should you get to deduct the full value even though the cash has not gone out the door? That would be "phantom" expense. It's perfectly reasonable for tax authorities world wide (not just the US Congress) to not like that.

I would much prefer a simpler tax code that promotes investment, but like everything there are downsides to that as well.

Now flip it around, if you invest in a drill or a building that's financed, should you get to deduct the full value even though the cash has not gone out the door? That would be "phantom" expense.

But that is only with the historically unusual circumstance where 100% bonus depreciation has been allowed.

When a concept like depreciation has been part of the tax codes of so many countries for so long, there is also probably a pretty good reason.

No, you can't deduct business expenses from lottery winnings period. Well, you can deduct them but it won't go well for you and your account if you are audited.

But that is only with the historically unusual circumstance where 100% bonus depreciation has been allowed.

When a concept like depreciation has been part of the tax codes of so many countries for so long, there is also probably a pretty good reason.

No what I am saying is the concept of depreciation exists because governments want to limit people's ability to game the system, and they don't want perverse anti-investor incentives. Businesses owners are smart, but occasionally there are smart people in governments as well.