As defined by the IRS, it does.

Our drill rig operator lost $500K. The IRS says he made a profit of $400K. The difference? The undepreciated value of the machine at $900K. You paid taxes on the value of the machine like it was income.

This is simple math you can't swipe away with semantics about what things are or or not defined as "profit". Our drill rig business has to pay taxes on money they don't have.


Terminology doesn't matter.

What matters is the bottom line. The operator lost $500K and has to pay taxes on a phantom profit of $400K. You can yell up and down all you want about what to call it, the results are the operator got taxed on the undepreciated value of the machine.


You have a net loss of $1M. Do you think the $1M just falls form the sky?


Yup, it sure does. Taking a $2M drill with $1M first year revenue:

If the drill was expensed entirely, then you have a net loss of $1M and you won't pay taxes on revenue until you cover that amount, likely after two years.

If the drill is depreciated, only $200K is put against the first year revenue, so you now have to pay taxes on $800K of "profits" due to the undepreciated value of the drill. So, yes, the drill increasing in cost did increase your taxes if you have to depreciate it.


The drill is an expense. That's the main point here. You have to buy one to run the business, and that costs money.

You can't define the cost of the drill to be this free money that shows up and doesn't cost the business anything. That's crazy.

If buying capital equipment was not penalized by tax law, businesses would buy more of it, which is more revenue for the companies that make such equipment, and more productivity for the company that buys the equipment, and more economic activity all around. It would reduce economic friction to build more productivity into the economy.

Mike C.

No, it is based on paying taxes only when I actually make money.

It is ridiculous to pay taxes on money I didn't make. Depreciation can cause that to happen.

Further, I want my taxes to reflect the true cost of buying a machine, not some devalued cost due to inflation. Depreciation is, basically, a 0% loan to the government in the sense you don't get to offset revenue in the future with the true value of the equipment corrected for inflation.

Mike C.

As someone that actually owned 5 drilling rigs, I find this conversation mildly amusing.

Not "boring"?

Mike C.

Not "boring"?

Mike C.

That “someone” is the IRS. There are times we are taxed on cash flow when we have not made a profit.

Cash flow in is always taxable, cash flow out is occasionally deductible.

That’s simply not true. Using depreciation as an example, in year one you cannot deduct all the cash-flow going out, but in every other year, you are not taxed on some of the cash-flow coming in.

I fully understand time value of money, but the reality is that most tax depreciation schedules allow you to deduct the loss of value on assets far faster than the actual real economic loss of value. For example, a new jet can be depreciated over 5 years. How many jets lose 100% of their value in 10 or 20 years let alone 5? The tax depreciation schedule is allowing you to take the tax deduction far sooner than your actual financial loss, so most of the time it is the taxpayer who is coming out ahead in the time value aspect. Note I said FINANCIAL loss, not cash-flow. Cash-flow is not profit and loss. Different words, different meanings.

That’s simply not true. Using depreciation as an example, in year one you cannot deduct all the cash-flow going out, but in every other year, you are not taxed on some of the cash-flow coming in.

New debt
Capital injection
Investment raise

P&L not involved. All generate cash flow.

New debt
Capital injection
Investment raise

P&L not involved. All generate cash flow.

Therefore your are taxed on the undepreciated value of the machine as income even though that isn't actually money.


At progressively lower and lower value due to inflation, thus never offsetting the true cost to the business of the machine.


They lose true value even if they have numerical the same value on the market. A $2M jet today is worth a lot less than a $2M jet 20 years ago, about 40% less using the last 20 years as a guide.


The financial loss all occurred the day you bought it, so depreciation DELAYS the tax deduction.

You keep treating the value of the machine like it is money you received, it isn't. It is sunk cost.

Mike C.

You guys do know the IRS allows cash based accounting for most small businesses? That turns all outgoing payments into expenses. Problem solved.

Bonus depreciation is an interest free loan from the United States tax payer. That's all it is. The loan is due when you sell the plane. The risk is that you are forced to sell the plane because of economic stress and then are also forced to pay back the loan.

Bonus depreciation is not worth that much money. Consider a $2mm plane. Assuming someone has more than a $1mm of ordinary income to shield and lives in a high tax state and their business is structured as a pass-through entity, it's about a $1mm loan. Since the IRS says planes depreciate over 5 years, it's a $1mm loan today vs. a $200k loan every year for five years.

If all you do is spend that tax savings on hookers and blow, there is no economic benefit except that you get to participate in those activities way more in year one. Maybe that's a good thing but not necessarily.

If you actually invest it wisely, the $1mm on day one will be worth more than the $200k invested every year at the end of five years. Using some really aggressive and unrealistic assumptions, you can say it's worth about a 5% difference in purchase price. If the buyer pays 5% more for his plane because of bonus depreciation, it has no benefit to him. If the buyer and seller split the difference, the buy gets a $50k benefit and the seller gets to sell his plane for $2,050,000 instead of $2mm.

The market makes way more out of bonus depreciation than the reality. Personally, I'm not a big fan of it because that interest free loan comes out of my pocket. I don't see why I should subsidize someone else's jet purchase. However if it's available, I will absolutely take advantage of it if I'm purchasing a plane.

That doesn't affect depreciation.


No, depreciation over multiple years is a 0% loan to the US treasury by the business.

Bonus depreciation is not a loan of any kind, it is a fair treatment of a business expense.


Not true.

In the purchase year, you offset revenue with the true value of the machine. In the sell year, you pay taxes on the proceeds in the value of dollars then. Everything squares up in the right dollars at the time of buy or sell. The business pays exactly the right taxes for the machine.

Depreciation is the US treasury taxing you on profit you did not make, both from not allowing the expensing of the purchase in the buy year and from the later years getting only partial value due to inflation.


It is not a loan, you had to pay $2M to get the plane. Why does everyone have a blind eye to the purchase cost?


Where is this money you are talking about? You spent $2M on the plane, duh! You are down that capital or in debt.


Where is this money you are talking about?

I need to figure out how to buy a $2M plane and have a spare $1M in my pocket because of it. What fantasy land is that from?


That's delusional, nothing is coming out of your pocket.

The benefit to the business is to treat capital purchases such that their true value is expensed. This will lead to more economic activity as companies invest more in that equipment, more jobs, and when the sell, a true taxing of the proceeds.

If what you are saying is that you want the IRS to purposefully penalize companies for buying equipment, then, yes, you want depreciation. Companies pay taxes on profits they did not make. That is fundamentally unfair.

Mike C.

Well, at least Mike and I agree on something!

That is not the case. If I expense all my large asset purchases, that gets subtracted off and spread out on a tax schedule the CPA does for annual filings.