Right but that's purely timing differences. If you purchase
a piece of equipment for $1M and it allows you to generate $500K per year in revenue. For simplicity assume no other revenue or expense. Let's say the accounting useful life of that asset is 5 years, but with accelerated depreciation you get to depreciate the asset over 2 years. Assuming a 35% tax rate your net income from an accounting standpoint will look like this (again HIGHLY simplified):
.....................Year 1..Year 2..Year 3...Year 4..Year 5
Revenue.......$500K..$500K..$500K..$500K..$500K
Depreciation.$200K..$200K..$200K..$200K..$200K
Pre Tax Inc...$300K...$300K..$300K..$300K..$300K
Book Tax......$105K...$105K...$105K..$105K..$105K
Net income...$195K...$195K..$195K..$195K..$195K
Your Taxable income will look like this
....................Year 1..Year 2..Year 3...Year 4..Year 5
Revenue.......$500K..$500K..$500K..$500K..$500K
Depreciation.$500K..$500K..$0........$0.........$0
Pre tax Inc....$0........$0.......$500K....$500K...$500K
Taxes Paid....$0........$0......$175K....$175K...$175K.
So with the accelerated depreciation, you would pay no taxes in years 1 & 2 and would have a very low (i.e. zero) tax rate relative to book income, but you would pay $175K in Years 3, 4 & 5 and have a higher rate. All of this gets VERY complicated and creates deferred tax assets/liabilities on the balance sheet, but in both scenarios over the 5 year period, you would earn $1.5M in pre-tax income and would pay an effective tax rate of 35% over the 5 year period. It would just create timing differences, not lower your overall rate. the timing difference is definitely a benefit, but it doesn't reduce the total amount of taxes owed, so accelerated depreciation can't be the "loophole" that causes companies to pay less than 35% in US taxes. In a given year, it can have that effect for an individual company or companies but in aggregate, it can't be the explanation for companies paying less than 35% over time.
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In response to this post by 111Balz)
Posted: 12/13/2017 at 4:15PM