Unjustifiable Spending Through the Tax Code

[nevergaveitathought]

what's your take on that quote of obama's?

its as if all money is the government's...and any forgone tax is spending...just the same as every wasteful dollar they do get their hands on

[Rudyard K]

It’s all just BS, political hype.

A couple of examples…

Oil companies – We all listen to the rhetoric about oil company profits. Hell, even O’Reilly beats up on them. But so that those of you who wish to know the truth understand…here’s the real story of the oil company profits.

If a company has $10MM in oil and gas sales (after normal daily operating expenses) under GAAP, they would book $10MM in income. And the oil company really did have $10MM in real cold hard cash hit their bank accounts. If that same company took that same $10MM and bought new leases, drilled new wells, and completed new wells…and spent every dime of the $10MM (again, in cold hard cash)…then that oil company would still report $10MM in income (under GAAP). Next year, they would start depreciating that $10MM over the expected life of the wells. But next year, when they sold $12MM in oil and gas (the same $10MM from the year before plus $2MM found in that year) they would be booking $12MM in GAAP income and all the whiners would be complaining about record profits…even though the oil company would probably spend $12MM to buy leases, or drill wells.

In the first year they took in $10MM in real cash, and spent $10MM in real cash. But on GAAP books (that’s the ones you hear on TV) they reported $10MM in profits. For tax purposes, the oil company would get to deduct the expenses that were classified as IDC’s. This would be what all the pundits call the tax loopholes for the oil companies. IDCs are the drilling costs that are not able to ever be recaptured. For instance, the cost of drilling the hole in the ground?...is an IDC. The drilling mud that was used while drilling?...is an IDC. The pipe that is run in the hole?...not an IDC. The wellhead equipment on top of the ground?...not an IDC. Typically, the expenses classified as IDCs run about 60% of the exploration costs. So, in the example used here (for tax purposes) the oil company would report the same $10MM in income, less about $6MM in IDC expenses, or $4MM in taxable income. That is the big “loophole” for oil companies. They spent $10MM in real cash this year…and got to deduct $6MM of it. Those rat bastards.

Real estate – In one other thread someone commented about real estate projects that gave real estate developers the ability to shelter income by depreciating assets. While this is true…(i.e. there is the ability to depreciate an asset over time)…it is only after the expenditure has been made…in real cash…that it is then able to be depreciated. But, for instance, in building a building…where $10MM in real cash has been spent to build the building. The $10MM is depreciated (for tax purposes) over 39.5 years. Yep, spend $10MM today…and get to expense (for tax purposes) a little over $250K per year for the next 39.5 years, against the rental income that you receive by renting out the building. And at such time as the building is sold for $20MM, years later, the amount that has been depreciated over the years must be recaptured as income (at ordinary income tax rates) and only the $10MM (over and above the original $10MM in cost) is treated as capital gains for tax purposes.

In any business…there is GAAP income…there is Taxable income…and there is Cash Flow. And those numbers and reports are far from equivalent. They do not come back to all being the same until the end of the life of a business…which in most cases, never occurs.

In no business that I have ever been involved in, has there ever been a deduction for tax purposes, that was in excess of the real expenditure (in cold hard cash) that had already been made. If you view that as a “Loophole”…then so be it. I view that as BS.