In my earlier Big Corp Tax Loophole Closer #8, my recommendation was to change the present very short tax depreciation lifes that all Big Corps use to depreciate their property for federal income tax purposes, to the much longer economic lifes of the same property used by Big Corps to depreciate this property in their audited financial statements.
My very rough estimate was that the tax raised by the US Government over the next 10 years would be up to $1 trillion for making that substantial, and fair, change in tax lifes.
The reason this amount raised is so large is that not only are the present tax lifes much shorter than the midpoint of the Tax Class Lifes of the property, but also the Tax Class Lifes are usually much shorter than the economic lifes of the property used in Big Corp’s audited financial statements.
But when a country has $14 trillion of debt, which is rising each year like weeds, I think there is a second Big Corp Tax Loophole on Tax Depreciation that also needs to be closed. This one relates to the highly accelerated tax depreciation methods used to depreciate property for federal income tax purposes.
Granted, periodically, when the US economy is particularly weak, like it has been in the past three and a half years, the US Congress will pass legislation that temporarily steps up tax depreciation in the first year.
Thus, in Dec 2010, the US Congress passed 100% first-year tax expensing of equipment for late 2010 and all of 2011 purchases, as well as another dose of 50% bonus tax depreciation for 2012 equipment purchases.
When I study the impact of past 50% bonus tax depreciation, the findings are consistent…..almost no job creation from it.
However, Big Corp earnings increase substantially from it, and there is a bump in real US real GDP growth from it.
Frankly, I think it makes no economic sense to give Big Corps either 100% first-year tax expensing for equipment purchases or 50% first-year bonus tax depreciation. The US Government is simply throwing away US taxpayers money in the short term, on these initiatives.
The only way 100% first-year tax expensing and 50% first-year bonus tax depreciation granted to Big Corps makes any sense, is if it is tied to US Big Corp full-time payroll count increases in the year of addition, and also this tax depreciation is recaptured proportionately in the next say four years, if these US Big Corp payroll counts get reduced.
But even with these 100% and 50% first-year tax depreciation incentives, there still is long-term depreciation lifes and methods, that apply to subsequent year additions. This Big Corp Tax Loophole Closer relates to that.
Focusing now on Accelerated Tax Depreciation Methods, it is just incredible how substantial the acceleration is for these Tax Depreciation Methods. Let me illustrate.
For the very popular MACRS Five Year Property Life category, the Tax Depreciation Method is Double Declining Balance, using the half-year convention.
Thus, for any MACRS Five Year Property, an incredible 52% of the Property’s cost is tax depreciated in only the first two years. And for a really tax aggressive Big Corp, if it buys this Property on Dec 31, 2013, it gets a 52% total tax depreciation deduction in only 366 days….in only one year and one day.
Also, for any MACRS Five Year Property, an incredible 71% of the Property’s cost is tax depreciated in only the first three years. And for a really tax aggressive Big Corp, if it buys this Property on Dec 31, 2013, it gets a 71% total tax depreciation deduction in only two years and one day.
And the same holds for the other MACRS Tax Class Lifes. A very tax aggressive Big Corp can buy MACRS Seven Year Property on December 31, 2013, and get total tax depreciation of 39% of the Property’s cost in only one year and one day, and get total tax depreciation of 56% of the Property’s cost in only two years and one day. And the Big Corp gets this highly-charged accelerated tax depreciation on property that has a midpoint Tax Class Life of 13 years.
Clearly, this is a substantial Big Corp Tax Loophole.
When I combine the Closing of the two Big Corp Tax Loopholes of Shorter Tax Lifes and Accelerated Tax Depreciation Methods, my very rough estimate is that the total CBO positive scoring over the next 10 years is up to $2 trillion.
I wouldn’t start making these Tax Depreciable Life and Accelerated Method changes until Property additions made starting in say 2013 or 2014, after the country has gotten out of its horrible job situation.
The economic damage to Big Corps from these two proposal is substantially softened here due to these corporate tax loophole closers being treated as a Temporary Tax Difference under US generally accepted accounting principles. The total federal income tax deductions for these Property expenditures will be the same over the long run. Thus, there will be no income tax charge to the income statements of these Big Corps from my proposals here.
If the US Government decides to squeeze the elderly, with cuts of Medicare and Social Security benefits, and at the same time, allows these unreasonable Highly Accelerated Tax Methods and Substantially Shorter Tax Lifes for Property, Plant and Equipment, the elderly should be absolutely incensed, not just at the Republicans, but also at the Democrats.
If this were to happen, it wouldn’t even surprise me to see some of the elderly to take it out on the unfairly tax advantaged Equipment located in retail stores they shop at, by pasting "Tax Cheat" stickers on this Equipment!