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In the darkness of night, Congress on Tuesday handed some of America’s largest telecom companies a huge tax windfall allowing many to continue taking a special 50% depreciation bonus that slashes their tax bills on new equipment purchases, winning substantial reductions in their federal tax bills.
CenturyLink had been heavily lobbying House Speaker Paul Ryan (R-Wis.) and other House leaders to extend a “temporary tax provision” that was designed to stimulate corporate spending on capital investments during the height of the Great Recession. Stimulus programs like these have allowed corporations like AT&T and Verizon to pay virtually no federal taxes at all for multiple years in a row. AT&T was the second biggest tax provision/corporate welfare recipient in the country, Verizon was fifth according to Citizens for Tax Justice. Between 2008-2012 taxpayers effectively covered the $19.2 billion in federal tax not paid by AT&T and $11.1 billion not paid by Verizon.
The two words that make it possible are: Accelerated Depreciation
Telecom companies, particularly those with wireless assets, are benefiting from the “temporary” stimulus program introduced by President George W. Bush in the last year of his second term because most are capital-intensive, spending regularly to expand, maintain, and upgrade their networks. CenturyLink has taken advantage of accelerated depreciation to invest billions in fiber network expansions to reach cell towers and businesses and on residential broadband speed upgrades the company claims would not have come so quickly without the tax savings.
Mobile companies like AT&T and Verizon Wireless are some of the largest beneficiaries of the stimulus program, using accelerated depreciation to write off expenses for cell tower expansion, network densificiation, and deployment of services like 4G LTE. In most cases, “accelerated depreciation” is technically a tax deferral, but because these companies maintain constant investment in network development and upkeep, the tax man never actually arrives at the door to collect.
Heavy lobbying from beneficiaries not only succeeded in getting the program’s expiration date extended, the Obama Administration agreed to expand it at the end of 2013. Companies slashed tens of billions off their tax bills as a result. A report from the Congressional Research Service, reviewing efforts to quantify the impact of depreciation breaks, found that “the studies concluded that accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.”
Citizens for Tax Justice added:
Combined with rules allowing corporations to deduct interest expenses, accelerated depreciation can result in very low, or even negative, tax rates on profits from particular investments. A corporation can borrow money to purchase equipment or a building, deduct the interest expenses on the debt and quickly deduct the cost of the equipment or building thanks to accelerated depreciation. The total deductions can then make the investments more profitable after-tax than before-tax.
The latest budget bill, passed Dec 15-16, extends the tax breaks until 2018 when the bonus drops to 40%, 30% in 2019, and zero in 2020.
Phillip makes it sound like accelerated depreciation is a feature of the tax code that applies only to telephone companies. That is not true. Any capital intensive company (e.g., General Motors, US Steel, PG&E, etc.) can avail itself of these provisions.
Yes, that is true. The article conveys that telecom companies are now likely to be the top recipients now that oil and gas (which during drilling-mania were ripe to reap these kinds of depreciation rewards) has been tempered by low oil prices. Even GE isn’t expected to benefit as much.
That is why their lobbyists were hot and active in DC over the last few months on this specific issue.
Why should I have to depreciate machinery and other physical assets on some schedule? If I buy a machine that is 1 million dollars why not take the full cost off the year of purchase and save the bookkeeping expenses of yearly depreciation? When the machine is sold then the sale price is reentered into the income of the company.
@lee: I went to the Citizens for tax justice web site(quoted in the article above) and looked for an answer to your question: Why we should Deprecate vs. Expense equipment for tax purposes? I could not find their answer to your question. It seems to make sense to simply take the expense in the year one makes the purchase. Rather than over some artificial, arbitrary and extended time period(aKa Depreciation). Deprecation schedules seem like nothing more than a government sanctioned ‘full employment Act’ for Tax Lawyers,Tax Accountants and IRS agents; cronyism. The world would be better off with less Tax… Read more »
If your company is expected to have a planned major increase in tax liability in the next fiscal year, for example, it can make sense to schedule the depreciation to give you the biggest impact.
Accounting maneuvers can make a huge difference. Of course you and I cannot afford the accountants that know how to get the most creative. Big companies do. All of the available loopholes can be exploited in ways even the elected officials who put them into the tax code do not understand.
Lee, if your company keeps its books on a “cash basis”, rather than an “accrual basis”, you wouldn’t have any depreciation, you would deduct the full cost of your long-lived assets in the year you purchase them. In fact, I think that’s how the US Government keeps its books. But most businesses starting out can’t afford to deduct the full costs of their assets in the year they are purchased, because there isn’t enough revenue to pay for everything all at once (at startup, there is zero revenue but many thousands in costs for land, buildings, equipment, etc.). Just like… Read more »
So…. I’m a bit confused as to whether this article was posted to convey a positive or negative message. Most of what I read was that the tax breaks kept the money out of the governments greedy hands (a good thing), and the companies claimed to use that money to expand an upgrade their networks (also a good thing). But at the end of the article there’s a suggestion that tax breaks like this don’t actually do any good. I think the one thing that didn’t get covered was whether or not the telecoms are telling the truth that they… Read more »
Not everything written here is intended to convey a positive or negative message. The accelerated depreciation has its good and bad points. In theory it can promote infrastructure spending on network upgrades that otherwise wouldn’t be prioritized. In practice, that appears to be questionable. It also means some companies end up with no federal tax obligation at all, which suggests unfairness. The CRS study looked at whether accelerated depreciation did indeed act as an economic stimulus as it was intended and found it really didn’t deliver the impact promised. Corporations used it primarily to dodge tax obligations and likely spent… Read more »
I agree with Phillip here. The actual economic benefit of accelerated depreciation can be debated. But the fact is, accelerated depreciation is a feature of the tax code, meaning it’s not a “tax dodge”. “tax evasion”, “a loophole”, or anything of the sort. It is 100% legal, and there is nothing unethical about it. If people want to eliminate it from the tax code, then convince your Congress critter to revoke it. Just remember: there are other tax “breaks” that many regular folks benefit from, especially the deductability of: (1) interest on home mortgages; and (2) property taxes on your… Read more »
While interesting to know what goes on in congress, not sure what this has to do with data caps.