I have to admit that I didn’t know what these ‘tax breaks’ were until I read the first article. It seems that the President wants to make corporations depreciate the cost of corporate aircraft over seven years instead of the current five years. Not being a financial wizard, I’m not really grasping the implications. ISTM there is a smaller tax credit for a longer time, instead of a larger tax credit over a shorter time. Wouldn’t that be a wash?
I can kind of see the airplane-makers’ argument that they will sell fewer aircraft if the plan goes through. OTOH, who replaces their corporate jet every five years? Maybe some companies do, and maybe there are tax incentives to ‘upgrade’. But airplanes last a long time, and it doesn’t seem (on the surface) to make financial sense to keep buying new ones if the existing ones are perfectly adequate. I believe tools should match the mission. For example, I’d love to have a new MacBook Pro. But my PowerBook G4 fits my needs perfectly well. Why upgrade? When and if I get into video editing, a new computer makes sense. Right now, it doesn’t. Suppose I started a business, and I needed to get from here to there. I might buy a Cessna Skylane. My business grows, and I need to cover more ground more quickly and carry more people. It might behoove me to upgrade to get something bigger and faster. Grow some more, and a turboprop would be in order. When I become a Great Big Corporation I might need a Gulfstream. But I’m not going to ditch the Skylane after five years if my company’s growth won’t warrant a larger, faster aircraft for ten years. I’m not going to change just because the ashtrays are full. (Do they even put ashtrays in airplanes anymore?) I could write off the cost of a new plane as a business expense, but I’d still be paying a buttload of money for the plane. Or, I could save money by not buying a new plane. Once it’s depreciated I can still write off interest payments on the loan and the operating costs. But as I said, I’m not an accountant.
I should start a
“Ask the Engineer that got laid off from Gulfstream because of the bail out restrictions on luxury items”.
I don’t know how the tax breaks of Dec '10 helped the industry since I was already laid off by then, but I do know that the industry was in very bad shape in the beginning of '09.
No, they do not put ashtrays in new jets. It’s not allowed for them to be sold that way. They can include ashtrays that fit in the cupholders, but using them on the plane is “wink, wink” prohibited.
Yes, the useful lives are decades. I’ve personally worked on jets from the 60’s and 70’s that were still perfectly airworthy.
This type of change is ridiculous. First of all, unfortunately there are many depreciation schedules that do not match the useful lives of the assets. You are certainly correct that a plan has a longer useful life than either 5 years or 7 years. Second, this is only a timing difference from a tax standpoint. The U.S. government would still receive the same tax revenue over the long run whether the item is expensed immediately or capitalized and depreciated over a 100 year period assuming no change in the units sold. The difference between a 5 and 7 year depreciation schedule is meaningless for an item like this. Third, some companies might like this and others might not. It all comes down to whether a company wants to show a higher profit or pay less in taxes (assuming both tax based and GAAP based financials made the same change). Fourth, I really doubt it makes a huge difference in the sales of private planes, but it would be a slight negative for purchasing an airplane.
Check out the following examples.
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Total
Revenues $100 $100 $100 $100 $100 $100 $100 $700
OpEx $50 $50 $50 $50 $50 $50 $50 $350
Depreciation $4 $4 $4 $4 $4 $0 $0 $20
Pretax Income $46 $46 $46 $46 $46 $50 $50 $330
Taxes (35%) $16 $16 $16 $16 $16 $18 $18 $116
Net Income $30 $30 $30 $30 $30 $33 $33 $215
CapEx $20.00
Depreciation 5 years
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Total
Revenues $100 $100 $100 $100 $100 $100 $100 $700
OpEx $50 $50 $50 $50 $50 $50 $50 $350
Depreciation $3 $3 $3 $3 $3 $3 $3 $20
Pretax Income $47 $47 $47 $47 $47 $47 $47 $330
Taxes (35%) $17 $17 $17 $17 $17 $17 $17 $116
Net Income $31 $31 $31 $31 $31 $31 $31 $215
CapEx $20.00
Depreciation 7 years
The CapEx is paying $20 for a plane. I depreciated it over 5 years and over 7 years. The rest remains the same. You can see that over a 7 year period, the tax paid would be equal.
A quick look at Aero Toy Store (damn fun site to explore!) suggests that a lot of their used business jets available for sale at the moment are in the 5-10 year range. The impression I got is that the companies/people who go out and buy a top-of-the-line plane replace it after a few years, and that plane becomes available as a good one for the next tier of corporations, and so on until you’ve got your 30 year old planes selling for cheap/parts. Governments are different. They hang on to their planes forever.
I don’t really have an opinion on the tax benefits though.
The primary benefit for the guvmint to stretch out the depreciation is to inflate profit numbers now and get the tax money now. As Longhorn Dave pointed out, it really is a net wash, except for the TVM.
Buffett gave an excellent answer on the plane question on CNBC in 3 real world contexts;
Buffett personally bought 100 hrs of private plane time for himself. There is ZERO tax advantage for him in this.
Berkshire bought 250 hrs of flight time for Buffett to travel on business at a cost of $1MM. The real world implication of a tax change on $1MM for a company is miniscule, less than a rounding error.
Buffett purchased 100 hrs of time for his 3 kids to share at a value of $500K. Not only does he not get a tax break but because this gesture is more than the $10K gift giving limits, Buffett pays $200K in taxes.
Clearly just a case of Washington class warfare against “fatcats with corporate jets”
It’s just another political illustration. Congress spends an enormous amount of time formulating special tax laws for industries that give them the largest bribes and ignoring the needs of the vast majority of it’s citizens.
The time value of money is extremely valuable. Which would you rather have:
A. $1 million a year for 5 years, or
B. $100 thousand a year for 50 years.
I’d take A every day of the week, it’s worth 2.4x as much as B in present value terms.
The issue about accelerated tax depreciation of machinery and equipment is one where the current administration is picking winners and losers. They are saying that if you use a private jet as part of your business you are not worthy of the same tax benefits as if you use a tractor/trailer. Why are they making this distinction? Because private aircraft are considered to be a luxury item of the wealthy. And this plays well to the working class voters. But numerous companies use private aircraft to save time and money everyday. They are legitimate business expenses.
This is all of course moot, since the machinist unions that have already been hard hit by low sales of private aircraft after congress took the banks and the auto makers to task for using their planes to fly to Washington when seeking bailouts, said, enough is enough, that Washington is destroying their industry.