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>>> Once the depreciation ran out on particular systems, they could then sell them to another operator, where the depreciation clock would start anew ohhhhh!!!

>>> Once the depreciation ran out on particular systems, they could then sell them to another operator, where the depreciation clock would start anew ohhhhh!!!! Tell me that's not the reason there are so many sub-contractors around. That seems a complex ut doable tax code fix

caminante 4y ago
I didn't follow the article closely, but I assume the author's alluding to resetting the accounting/tax/depreciable basis of the assets with an arm's length sale. There is a tax concept using "leased employees" where you pre-pay for a vendor to work on-site, and it counts as an asset on the balance sheet. I don't think that applies to independent contractors. Sub-contractors are popular because 1. They don't count in key performance metrics like revenues/employee or liabilities (paid vacation) 2. Their costs are buried further down the income statement and appear as non-recurring/variable. 3. They can ramp up/down with less approvals.
sokoloff 4y ago
It’s not nearly as large a dodge as presented. Ideally the economic (tax) life would be similar to the practical life, but “depreciation allowed or allowable reduces your basis” in the asset, so when you sell it, you will have a gain on the sale if it’s for more than your basis. You will be taxed on a portion of that which is depreciation recapture at a higher rate than the capital gains rate and at the capital gain rate for any gains above the basis plus depreciation recapture. So, the new operator gets to start depreciating from their basis (which is fair and right), but the old operator has a gain to have taxed (or delayed by a 1031 exchange). It’s a cash flow difference in taxes as well (making it fair to include in the article), but not a permanent avoidance of taxation.
WastingMyTime89 4y ago
There is no real fix here. The article is wrong. The effective tax erasure when you do that is not really significant. When you resell the depreciated asset, you make a profit which “erases” the depreciation and will have to pay taxes on that. You have actually just deferred your taxes. That can be advantageous cash flow wise but that’s pretty much it.
- hef19898 4y ago
  Bring advantageous for cash flow is the whole point, isn't it?
- remote_phone 4y ago
  You are repeating exactly what the article said.
  - brmgb 4y ago
    No, I fundamentally disagree with the idea that the clock is starting anew when you sell the asset. The buyer can start depreciating but the seller just paid taxes on the benefits it received from the sale which is an equivalent cash flow. You can in fine only depreciate once per asset. The whole reselling thing is bogus. There is no real tax shielding coming from depreciation. If you just invest to replace existing depreciated asset, you just reach a steady state where you indefinetly write off real loss of value in infrastructure and pay taxes on real income which is things working as they should. The real tax shielding actually comes from debts and means you can finance your investment in new infrastructure advantageously by using the tax write off. The interplay of debts and depreciation is not involved: that would remain true without any depreciation. Anyway, the point of Malone through EBIDTA wasn't about cash flows anyway. It was to show that if you ignored how new investments were financed, the company was actually earning money and was profitable and these profits would materialise as soon as the company would stop expending which is indeed exactly what Amazon did again years later. To get back to the article, I don't really understand what follows the part about Malone. If the point was that raising money through debts would be preferable to raising through capital, I would obviously have agreed but that's kind of obvious and startups wouldn't use VC money if they had access to debt anyway. Instead, he is somewhat talking about WCR without mentioning WCR which is weird before coming back to his initial argument about VC without having really at any point discussed the subject. What a mess.

caminante 4y ago

I didn't follow the article closely, but I assume the author's alluding to resetting the accounting/tax/depreciable basis of the assets with an arm's length sale. There is a tax concept using "leased employees" where you pre-pay for a vendor to work on-site, and it counts as an asset on the balance sheet. I don't think that applies to independent contractors. Sub-contractors are popular because 1. They don't count in key performance metrics like revenues/employee or liabilities (paid vacation) 2. Their costs are buried further down the income statement and appear as non-recurring/variable. 3. They can ramp up/down with less approvals.

sokoloff 4y ago

It’s not nearly as large a dodge as presented. Ideally the economic (tax) life would be similar to the practical life, but “depreciation allowed or allowable reduces your basis” in the asset, so when you sell it, you will have a gain on the sale if it’s for more than your basis. You will be taxed on a portion of that which is depreciation recapture at a higher rate than the capital gains rate and at the capital gain rate for any gains above the basis plus depreciation recapture. So, the new operator gets to start depreciating from their basis (which is fair and right), but the old operator has a gain to have taxed (or delayed by a 1031 exchange). It’s a cash flow difference in taxes as well (making it fair to include in the article), but not a permanent avoidance of taxation.

WastingMyTime89 4y ago

There is no real fix here. The article is wrong. The effective tax erasure when you do that is not really significant. When you resell the depreciated asset, you make a profit which “erases” the depreciation and will have to pay taxes on that. You have actually just deferred your taxes. That can be advantageous cash flow wise but that’s pretty much it.

hef19898 4y ago
Bring advantageous for cash flow is the whole point, isn't it?
remote_phone 4y ago
You are repeating exactly what the article said.
- brmgb 4y ago
  No, I fundamentally disagree with the idea that the clock is starting anew when you sell the asset. The buyer can start depreciating but the seller just paid taxes on the benefits it received from the sale which is an equivalent cash flow. You can in fine only depreciate once per asset. The whole reselling thing is bogus. There is no real tax shielding coming from depreciation. If you just invest to replace existing depreciated asset, you just reach a steady state where you indefinetly write off real loss of value in infrastructure and pay taxes on real income which is things working as they should. The real tax shielding actually comes from debts and means you can finance your investment in new infrastructure advantageously by using the tax write off. The interplay of debts and depreciation is not involved: that would remain true without any depreciation. Anyway, the point of Malone through EBIDTA wasn't about cash flows anyway. It was to show that if you ignored how new investments were financed, the company was actually earning money and was profitable and these profits would materialise as soon as the company would stop expending which is indeed exactly what Amazon did again years later. To get back to the article, I don't really understand what follows the part about Malone. If the point was that raising money through debts would be preferable to raising through capital, I would obviously have agreed but that's kind of obvious and startups wouldn't use VC money if they had access to debt anyway. Instead, he is somewhat talking about WCR without mentioning WCR which is weird before coming back to his initial argument about VC without having really at any point discussed the subject. What a mess.