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Migeru:
But the reason that's booked for tax purposes is that it's also booked for firm valuation purposes.

Starvid is seeing it from the income statement side, where the investment would be booked as 100% cost in year 1 (therefore lower profit => less tax). While of course there's the balance sheet to be considered: if you book 100% in year 1, then the asset has no value on year 2's balance sheet. Which would be a false image of the company's value. (I know that's what you're saying, I'm just putting it another way).

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Jan 26th, 2011 at 11:03:50 AM EST
[ Parent ]
Gah, this hinges on the difference between a cash flow statement and an income statement. Depreciation is a cost but not a cash outlay...

Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it - Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Jan 26th, 2011 at 11:10:40 AM EST
[ Parent ]
Don't follow you on cash flow. Annual taxation is based on (roughly speaking) income minus costs ie the income statement.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Jan 26th, 2011 at 11:31:25 AM EST
[ Parent ]
There ARE considerations other than the tax benefit, though one would hardly know it from the discourse in the business sections of the popular press. Double entry what?

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 27th, 2011 at 03:30:14 PM EST
[ Parent ]
Sure you would get a pretty funny situation, if you took all the tax credit in year one but also wiped out the entire book value of the asset in year 2! :D

What I'm proposing is not that though: the balance sheet value of the asset should still be depreciated by 5 % per year, but the entire tax credit should be allowed to be claimed year 1. I think this might very well be the most efficient tax cut ever, bang-for-the-buck-wise.

Now, please rip it to pieces. :)

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Jan 27th, 2011 at 08:03:44 PM EST
[ Parent ]
There's no good reason to not write down the asset at the same time you depreciate it for tax purposes. You're never going to become insolvent due to tax-motivated write-downs, because your tax incentive stops when your income for the fiscal year hits zero. It can't go negative due to accelerated depreciation, since you don't get money back in taxes when you're bleeding money.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jan 27th, 2011 at 11:07:19 PM EST
[ Parent ]
This may be purely national, but in France you can certainly count a deficit in Year N, by either getting a refund on tax paid in Year N-1, (carryback), or by carrying forward to reduce next year's (or over several) taxable profit.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Jan 28th, 2011 at 02:16:50 AM EST
[ Parent ]
The reason is to if you do write if off all at once, you're going to have a balance sheet which doesn't give a fair view of your actual assets. That €40 million tanker is still worth €40 million in year 2, or at least €38 million. Creating hidden values in balance sheets doesn't help anyone.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Fri Jan 28th, 2011 at 06:36:22 AM EST
[ Parent ]
You're always going to have a balance sheet that doesn't give a fair view of your assets - most fixed assets last longer than you depreciate them over (that's why coal looks so cheap; all the plants are fully depreciated, but remain functional).

And I disagree on hidden assets being of no help. They serve to stabilise balance sheets against cyclical variations. And, for the most part, it is not unreasonable to mark assets up during a downturn and depreciate them faster during an upturn. Because the conventional wisdom during an upturn tends to overvalue assets, so marking assets up during the nadir of the business cycle means you're more likely to get a realistic valuation, while depreciating assets faster during the upturn will make it less likely that you overshoot the long-term value of your firm.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Jan 28th, 2011 at 11:23:55 AM EST
[ Parent ]
You're always going to have a balance sheet that doesn't give a fair view of your assets

This is no reason to make balance sheets less transparent than they need be. If so, we could just abolish balance sheets outright.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sat Jan 29th, 2011 at 03:29:18 PM EST
[ Parent ]
This could be done as a political choice, certainly. I'm not sure it would be hugely successful as stimulus, because I doubt if companies make major investment decisions (we were discussing 20-year depreciation) for tax reasons. It might trip a few switches, though.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Jan 28th, 2011 at 02:11:30 AM EST
[ Parent ]
This wholoe discussion is nothing new. many Governments, including the UK have allowed for accelerated tax depreciation, or 100% tax write off in the year of investment, and this does not have to be reflected in the asset register. Instead, you can record a liability for tax refund repayment in the balance sheet, which is amortised, cash less, over the economic life of the investment.

The whole point of this kind of incentive is to make it attractive within a certain time window to make an investment, threby bringing investment forward.

having reclaimed 100 % tax credit on the investment in year one, you are unable in subsequent years to use the accounting depreciation on that specific asset to offset corporate tax, so you future marginal tax rate increases.

by senilebiker on Sat Jan 29th, 2011 at 07:48:45 AM EST
[ Parent ]
It seems this is a pretty ordinary policy in Europe. And here I thought I was onto something new. :P

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat Jan 29th, 2011 at 03:31:26 PM EST
[ Parent ]
It is in fact (I now find) practised in France re targeted investments, most recently photo-voltaic.
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Jan 31st, 2011 at 09:58:11 AM EST
[ Parent ]

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