Some peeps just don’t get it, do they?
The tax laws generally allow companies to write off their capital investments faster than the assets actually wear out. This “accelerated depreciation” is technically tax deferral, but as long as a company continues to invest, the tax deferral tends to be indefinite.
Err, no. Depreciation of assets is in fact tax acceleration. The accelerated depreciation is the reduction in that acceleration. Immediate expensing is the elimination of it.
Think on it. A company buys an asset for $100. It’s going to last 10 years.
With no depreciation schedules for tax the company claims the expense of the $100 in that first year. It is, after all, an expense. The company has paid out the money, the $100. The shareholders don’t have the $100 any more, do they, they’ve got the asset. In year two the profits to be had from that asset are taxed normally, in year 3 and so on.
Now we have tax depreciation. Decade asset, $100, so, $10 each year (straight line for the purists). So, the company takes $10 off revenue in year one, $10 in year two etc before calculating the profit upon which tax is paid. Sure, it’s more complex, but this is the essence.
So, company pays tax on more of the profit in year 1, 2 , 3 etc as a result of the depreciation schedule. Over the decade the amount is entirely the same.
Without depreciation schedules the tax comes later, with the depreciation schedules the tax comes earlier. The depreciation schedules are thus a tax accelerant. And the immediate expensing is thus a removal of the tax accelerant.
If people just aren’t able to grasp these simple concepts about the tax system they’re not going to tell us much of use about the tax system, are they?
This is also particularly twattish:
Accounting rules require a company to, at the time a stock option is granted to an employee, estimate the value of that option on the date it will be exercised, which is difficult to predict. Unlike the accounting rules, the tax rules allow the company to wait until the employee exercises the option, which could be several years later, and claim a tax deduction equal to the value of the stock option at that time, which can be much larger than the value reported to investors.
It does not make sense for companies to treat stock options inconsistently for tax purposes versus shareholder-reporting or “book” purposes.
The accounts must reflect what they think the cost is going to be, thus the estimate of the future cost. Both the investor and the tax accounts should reflect what the actual cost is. Which we know only when the option matures. At which point we report the correct figure to the taxman and then also adjust that figure to shareholders. And yes, that last does indeed happen.
Do also note that if the company waits then it’s the opposite of a tax deferral, as complained about concerning depreciation allowances. They are waiting 3 to 5 years to report the expense. So, they’re paying tax as if the expense doesn’t exist for 3 to 5 years. This is something to complain about, right?
But, you know, for some people the answer just always is MOAR TAX.