The quick write off or accelerated depreciation

[kraft-t]

What that does is to allow depreciation deduction prior to the expense occuring. I think many farmers would be in favor of deducting the next 7 years worth of cash rent or seed expense before the expense actualy occurs.

Depreciation is a legitimate expense but only during the lifetime of the machine. !00% depreciation of equipment that may last a decade or more is a gift to businesses. What we have is thousands if not millions of items getting quick writeoff which drasticaly cuts the flow of revenues to the treasury. We need to take the focus off of tax avoidance if we are to have any hope for a balanced budget.

[farawayguy]

Okay, I'll argue the flip side. Say I just spent $100,000 on a tractor. So the money is gone from my bank account. Seems to me even an accelerated depreciation is a slowed down version of the facts I see when I look at my depleted bank statement. I think the main reason depreciation (accelerated or otherwise) seems right is that we've been trained to think that way by all the years of doing it. I'd say writing off my cash expenses in the year I have them isn't strange at all, and if we'd done that all our lives, and someone came up with this crazy depreciation rule, we'd be outraged. Just an argument of cash accounting verses accrual accounting and not really a right or wrong to it either way.

Interesting thing about this with regards to the flat tax, is that while apparently many here believe it would mean changing over to straight line depreciation, the flat tax itself means buying capital items could no longer be used to manipulate tax brackets, so the now eliminated accelerated depreciation, if left intact, would have lost most of it's punch anyway.

And please don't bring up the time value of money - as we all know, it doesn't have any anymore.

[kraft-t]

Depreciation by my definition is a decline in value which is indeed a legitimate expense. That fact that your cash went from the bank to machine does not indicate a loss of value any more than moving your cash from one bank to another.  But of course I realize that there is some immediate depreciation like driving your new car around the block. But that doesn't mean you machine has lost all value on day one and that is the point of this debate.

If depreciation is instant and it is agrued that it is good for the economy, then lets allow joe sixpak to write off his car or pickup in one year as well. He needs transportation for work as much as we do and it is every bit as much stimulation to the economy.

[farawayguy]

Okay then, if you want to reflect value and not actual cash, accelerated depreciation is closer to your reality. Most capital goods (except maybe structures) lose more value in the early years than they do in the later years.

[Kay/NC]

My understanding of accelerated depreciation is that it is meant as an economic stimulus to the providers of good depreciated...like John Deere or Caterpillar. I think it has precious little do do with helping farmers or other purchasers, and if depreciation is used up with years of payments to follow, it can actually be counterproductive.

[farawayguy]

Well, the real stimulus is the sec 179 deduction, which let folks write off up to $500,000 for 2013. That pretty much turns equipment purchases into the cash accounting I mentioned, at least for most farmers. I wonder how many farmers won't chose to take that to the fullest extent when they do their taxes (or is everyone finished already?). This year, the new limit is only $25,000 and that no doubt will affect many here. 

[BA Deere]

What you should NOT lose sight of is Sec 179 isn`t a tax free gift.  It just spreads out the taxes owed...it could be argued that it`s a tax increase, because if you`re making payments on borrowed money with AFTER tax dollars and the rates go UP.  MORE taxes with have to be paid to get those after tax dollars, say 5 years down the road.

Rapid depreciation just tricks you into spending, giving you the false impression that you`re somehow "beating the tax man", but like a casino the house always wins, if you play long enough.

I understand why it`s seen as a economic stimulus, because it shakes loose moldy money into the economy.  It`s that the basis of the Keyesian economic theory, to spend money that you don`t yet have?

But like a rodent, constantly having to gnaw on wood to wear down his growing teeth. Once you start that morphine drip of using depreciation to avoid taxes, unless you talk yourself down slowly, that dragon`ll bite ya.   🙂

[smokeyjay]

Yes, and the 179 deduction, in accounting terminoligy does not really adhere to generally accepted accounting principles, as it does not recognize a normally accepted allocation and offset of depreciation expenses to revenues (as they are earned and expenses against those revenues recognized).  So, the 179 deduction is a tax writeoff to encourage earlier purchases of capital goods, soley for the purpose of increasing economic activity.

[smokeyjay]

Section 179 does not spread out the taxes owed, but it accelerates -- up to 100%, not to exceed the maximum limitations -- the write off, lowering taxes for that year.

The best way to manage the financial side of it is to avoid borrowing the majority of the capital needed for the 179 deduction.  Which means you pay for it out of a positive cash flow, out of working capital and as little as possible to be financed with debt.

[farawayguy]

BA, mostly agree, but I'd say Sec 179 is a tax free gift to the extent that it's used to lower a tax bracket for a particularly high income year. In that case, the taxes are never recovered by the IRS.