I’ll tell you what it is, in a single word, too:
It’s a complicated matter, but the bottom line is that in order to save the economic system we purport to love, it’s time for a serious rethink of what’s a business expense and what’s not.
We start with a short discussion of what Depreciation is all about: A Wikipedia snip is useful here:
“Depreciation is a method of reallocating the cost of a tangible asset over its useful life span of it being in motion. Businesses depreciate long-term assets for both tax and accounting purposes. The former affects the balance sheet of a business or entity, and the latter affects the net income that they report. Generally the cost is allocated, as depreciation expense, among the periods in which the asset is expected to be used. This expense is recognized by businesses for financial reporting and tax purposes. Methods of computing depreciation, and the periods over which assets are depreciated, may vary between asset types within the same business and may vary for tax purposes. These may be specified by law or accounting standards, which may vary by country. There are several standard methods of computing depreciation expense, including fixed percentage, straight line, and declining balance methods. Depreciation expense generally begins when the asset is placed in service. For example, a depreciation expense of 100 per year for five years may be recognized for an asset costing 500.”
The Positive Aspects of Depreciation
To be sure, business accounting is sometimes a bit obscure, so with the MBA hat on, let me run you through the basic idea:
I always like economic discussions (at least at this time of day) that involve a latte stand. So let’s pretend we’re all baristas who have saved up the tips for the past 30-years and we can finally get our own coffee machine.
In conventional economics, you will be able to depreciation (write off) the cost of not only the cart, the supplies, but also the coffee machine, the beans, the water, and all the legit expenses that go into the cart.
When you sell a cup of coffee to a fellow reader here, you base the cost of the cup on all these things: Hot water, beans, cups, napkin, shake of chocolate, spritz of nutmeg, or whatever. Then you back out some salary and something in the kitty as “retained earnings” for the owner.
And thanks to the magic of accounting, you get to write off some portion of the cost of the machine over some period of time.
There are some kinds of equipment (computers, software, and such) that might qualify for a 100% write off in the year you bought the equipment. That is, if it qualifies under IRS Section 179.
To stay current, I’d refer you to two places: IRS Publication 946 over here. And there’s a marvelous website run by www.section179.org where you can find all kinds of business applications for the IRS rules.
Here’s where things can become complicated: If you want to use 179 rules, it’s generally for the purchase of a quickly-depreciating asset. Here, for example, I will update computers once every three to five years. Same thing with printers, scanners, and software. It’s done because these things a) wear out very quickly (or become obsolete) AND because they are a legit part of doing business.
Now your Latte Machine? It may be – and you’ll be guided by a real CPA come tax time on this – that your machine may be acceptable for a 179 write-off, OR because it is one of those fancy high-end production machines, it may be a 5-year write-off.
Again, this is between you, your Accountant, God, and IRS, although there’s some confusion at times between ’em over who plays what role…
The good news is that in today’s fast-moving economy, you MAY be able to quickly write off some of your expenses and that should make achieving profitability quicker and hence you would (hopefully, from the government’s view) end up paying regular income tax on the payments you make to yourself.
Even if you don’t make a lot of money, the government will take its pound of flesh in the Self Employment Tax, and if you find a place where you can peddle a boatload of latte’s without a county health department, inspections, licenses, training, manuals, state sales taxes, and….well, you get the picture…Depreciation has its place, especially in the world of start-ups IF YOU KNOW SEC. 179.
Depreciation and Spendy Stuff
There are many areas where things like real estate depreciation, can be a very slow, long-term benefit. Certain buildings and structures might be 20-years, or even 40-years before becoming fully depreciated.
And even then, if you have written off a building to zero value, then turn around and sell it, you have to “recapture” (read: pay back) excess depreciation claimed. Oh, shucks.
But there are many ways to “skin this cat.”
One of the cutest (from a business model standpoint) that I ever saw was a private vocational school outfit.
They loaded up their expenses with lots of real estate leasing expenses and (as an idiot) I called out this little detail to the people I was consulting for.
I won’t go into names and such, but the owners of the school had a separate LLc which was not part of the school, that was accruing ownership of the property.
And so, it turned out, the owners were not particularly interested in maximizing cash flow on the school side of the operation, because they were making a fat slice on the real estate leases for the school and that (turned out) was where the real money way.
Now Let’s Talk Machinery
The same kind of thing can happen in just about any high-dollar, low depreciation rate, item you can think of. I’ve got personal experience with jet airlines, as an example.
Again, just like with the school’s, you can have a case where an airline may seem to be doing no better than breaking even, but when you drill down you might find, oh, and offshore tax-advantaged lease, for example.
This is why whenever you’re in management of a business, it’s important to be clear on how much money you want to “take out” and how you want to take the payout in order to maximize personal income (we do love our long-term capital gains rates, right?) versus those terrible short-term gains.
Same thing works on Wall St. A high end hotshot may get a one-year taxable income of $600,000, but the off shore options, worth perhaps $10-million held for more than a year, come home over the next several years at the artificially low long-term gains rate.
So yeah, this is how the one percent may appear to be in a higher tax bracket (on this year’s income) but when you zoom out, you see how they “crook the game” at the expensive of the rest of us.
The Dark Side of Depreciation and Long-Term Gains
The dark side is simple for long-term gains. Originally, these were enacted to give a tax advantage to those people who were willing to put up risk capital for new productive industry.
Say you wanted to drill an oil well. And say it took you more than the 120-days the physical drilling usually takes… Say you run it out 1.5 years. Organizing the geology, leasing the rights, finding a rigs, putting together the money, drilling, getting the rig into production… Sure, I could make it longer than a year. Maybe a second well as part of the deal to be safe.
Here’s where long-term gains are good: People who might not otherwise take a risk, MIGHT do so under these conditions because there is a significant chance of losing theirs whole investment, so why not get something for the risk on the back side.
All fine, holy stuff.
But now let’s suppose you are a 28-year old quant and you’ve been gifted $6,000,000 of (can’t lose)stock options offshore. Should that really come back to the n umbers twerp at the long term rate when the odds of him losing all his dough was approximately zero?
So that’s one reason the Swamp still works. People who live in places like Greenwich, CT get money like this from offshore all the time in some social strata. And they’ll tell you how taxes are too damn high in America.
Easy to do when you’re stuffing the sausage into the consumers for things like the roads your limo drives on.
And About Depreciation
We are quickly approaching a similar situation to where depreciation will be turned on We the Peeps like a new kind of WMD.
Only the way it will work this time?
New driverless trucks will be along. And since they will be high dollars and lots of software, they willk be adjudged to be fast write-off units.
So fast, in fact, that they will likely have a significant price advantage over humans.
When this occurs, it will be – in effect – turning another Tax Gun on the working class.
My late, late, late, grandfather Andrew N. Ure, was one of the key apologists for the British Factory Owner class – and he gained the wrath of one Karl Marx who never did a lick of real work in his life, sitting around Chicago street-organizer-like whining in Paris about the poor bourgeois. All he missed was the slick jingoism like “Change!” but he got his revolution eventually.
As the great wheel of history turns, I am not going to defend sweetheart deals on depreciation for a reason.
Depreciation as presently embodied is a negotiated payoff to the ownership class. Congress gets their speaking fees, campaign contributions, and the networks get slack for their Trump bashing and going along with the corporate agenda.
From the outset, Depreciation has been claimed because as the ownership class points out, machines do wear out.
But the larger reality (and where the social equation hasn’t been added due to payoffs at the top) is that the displaced workers – jobless because of machines – do not get paid for their displacement into the future.
My grandfather, more recently, was a lineman for Puget Sound Power during the Great Depression. hard work driving a Dodge PowerWagon all over hell and yonder in the Washington Cascades and such. But back then, the Teamsters were a strong union, so they set up a retirement system that did the family a solid.
In a sense, what the unions of the last Depression did was ensure that those who did the work not only got some now (present day) but they got a tiny (and boy it was tiny) slice going into the future.
That’s why the Second Depression will be such a bitch.
Not just because a bunch of grays like Elaine and me will croak (all around the same time with a properly timed flu outbreak), but we will have robots replacing the baristas, and the clown posse known as the Fools on the Hill (who are so tango -uniformed they don’t even know which party they really are acting like) will be unable to do anything other than be the jumping lapdogs of the rich.
And they are getting the Big Fix ready. Censorship of social media, global tax scams behind questionable science of “climate change” it’s all part of the social controls that will eventually lead to the Great Hunger of the 2020’s.
Could we fix it?
Oh, sure. Easy: make allowable depreciation operate like a T-Account. The net of the benefits of the machine versus the potential income taxes which would be paid by the worker(s) it displaces.
This, my friend, is the most terrifying thing you can imagine for the One Percent.
North Korea, wars, pandemics, conquests and disasters…none of it is so dangerous as talk of genuine humanely considered tax reform of both long-term gains and depreciation allowed.
As luck would have it, it’ll never be changed until the whole system is collapsing and by then it will be too late.
But you, dear reader, will have a handy pocket guide to watching where the smell stuff will hit the rotating roundy-thing.
Woo-Woo: Significance of 468?
It means something, but I’m not sure what.
Last week in a single trade I made $468.90 in a five hour market trade.
Then last night, Elaine and I were watching Amazon and we selected a hiking documentary where a couple of San Francisco fellers walked from the Mexican border to the Canadian border.
Elaine, as I’ve told you, has a remarkable “artist’s eye” for detail.
“HOLD IT! Back up to the cash register scene!”
Sure enough, as the two guys were check out of a store with supplies for the trip, the total shown was $468.72.
Here’s my question: When an odd number – the ONLY number remotely in this range – pops up twice in four days…is it meaningful?
Ideas and input welcome on this.
Write when you get rich,