Saturday, July 23, 2011

Big Corp Tax Loophole Closer #8: It’s More Than Just Corporate Jets

Corporate Jets have taken center stage, but so many of the tax depreciable lives used to depreciate Property for federal income tax purposes are much shorter than their economic lives. Thus, this clearly is a substantial tax loophole, which the country just can’t afford, given its incredibly high US Debt level.

For instance, the Seven-Year Modified Accelerated Cost Recovery (MACRS) Property category includes property with a Class Life of 10 years and up to just short of 16 years. By depreciating this property for tax purposes as Seven-Year Property, the present tax depreciation deductions occur over a period of eight years. If instead, this tax depreciation deduction was lengthened to say the midpoint of this Class Life, or 13 years, the US Government’s CBO positive scoring over the next 10 years would be off-the-charts.

I think the Feds should review in detail all of the properties in its various Categories of Class Lifes and the resultant Tax Depreciation Lifes, and compare that with the actual best estimate of Economic Lifes of all individual property assets included in each of the Property categories of real companies. These Economic Lifes for a specific company are readily available because they are included in each company's computerized fixed asset system. And for all large companies, and many smaller companies, these company's fixed assets are audited annually by their external CPA firms.

And in cases where the Tax Depreciable Lives are both clearly and substantially shorter than the Economic Lifes of the Property being used by companies, I think consideration should be given to increasing the Tax Depreciable Lives to the actual Economic Lifes being used to depreciate the property in each company's audited financial statements.

I would only apply this lengthening of Tax Depreciable Lifes to really Big Corps, with Total US Property, Plant and Equipment above say $1 bil.

I also wouldn’t start making this Tax Depreciable Life change 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 this proposal is substantially softened here due to this corporate tax loophole closer 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 proposal here.

There will be substantially positive CBO scoring to the US Government from this proposal, for the next 10 years and for many years thereafter. My quick back of the envelope computation says that the total positive CBO scoring to the US Government over the next 10 years could very well be up to $1 trillion.....after all, the impact of just adjusting corporate jets by several years amounted to $3 bil, and that didn't adjust them to their longer economic lifes.

And when you think about it, in all fairness, how in the world can the US Government require that the Medicare age for when benefits begin be increased from age 65 to age 67, and also require that the annual inflation adjustment factor of Social Security benefits be reduced, when at the same time, it is not requiring a business to correct its tax life for depreciating a piece of property that is egregiously too short in comparison to its audited economic life?

And even if these lifes were properly adjusted to their audited economic lifes for federal income tax purposes, as they should be, these companies would still be getting the huge economic benefit of an accelerated depreciation method.

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 tax lifes for Property, Plant and Equipment, the elderly should be absolutely incensed, not just at the Republicans, but also at the Democrats.