President Obama has called for changing the depreciation schedule for newly aquired non-commercial aircraft from five to seven years. Jay Carney, the president’s press secretary calls the current two-year schedule difference a special tax loophole. As you might imagine, this has pushed the aviation alphabet groups into damage control mode.
Being of limited ability to comprehend “Washington speak” I decided it would be good to run through a few numbers to see if I could understand (and create some context for myself) what the President is recommending.
Scenario: I’m in the market for Piper Matrix for my Midwest-based three-state construction company. List price for a Garmin G1000-equipped Matrix is $939,950. According to Crest Capital’s Tax Deduction Calculator I can deduct: $500,000 (Section 179), $219,975 (50% Bonus Depreciation deduction), and the remaining $219,975 is placed on the company’s balance sheet and depreciated over five years ($43,995 per year). Total first year deduction will be $763,970. [It should be reiterated that neither the Section 179 and Bonus Depreciation deductions aren't the "special tax loophole" the President seeks to close.]
My construction company will bill $45 million this year and earn an industry average 3.9% return or $1,755,000 net income. That puts my company at the 34% marginal corporate tax rate with a $603,500 federal tax bill.
However, my Matrix purchase reduces my net income and tax bill to $991,030 and $336,950.20, respectively. That’s a 44% tax savings in year one of owning the Matrix.
If the “special tax loophole” is closed and my company must depreciate the Matrix over seven years, my net income and tax bill, using the numbers cited above, will be $1,003,600 and $341,224, respectively.
The difference? $4,273.80 in additional federal tax revenue for the government the year I buy the Matrix. And if my company performs the next year like it will this year, my tax bill will top $600,000 unless I elect to purchase those ten $95,000 dump trucks I have my eye on.
Adjusting the depreciation schedule — I mean closing the “special tax loophole” — from five to seven years will produce roughly $300 million in additional revenue for the government. That is 3/10th of 1% of the $85 billion sequester.
I’ve tried to not inject my opinion in the above numbers and comments. In fact, my CPA confirmed my numbers are accurate as relate to 2013. But I must say, a depreciation table is NOT a “special tax loophole.”
This whole discussion feels like trying to save a person mauled by a bear with a simple band-aid. That won’t work, and neither will this. While this may appear critical of the President, and it is, I’m firmly of the opinion that no elected official in Washington is honestly interested in solving the puzzle. If they were, they would.