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I think the point of the accelerated depreciation is roughly equivalent to taking a loan with 0% interest. It's allegedly zero-sum with respect to net income. T

I think the point of the accelerated depreciation is roughly equivalent to taking a loan with 0% interest. It's allegedly zero-sum with respect to net income. They get to claim this income later, with various benefits, e.g. more cash on hand in the intervening period, inflation makes that "debt" less valuable later, and it's possible that the corporate tax rate will be lower in the future, so the tax rate on "this year's" income is lower.

SeanAnderson 2y ago
That makes sense, thanks. Inflation makes debt cheaper to pay off in the future and transitioning into a right-leaning government hints at corporate tax rates being more favorable in the future. I guess the caveat here is that it can be adversarial to short-term investors since the businesses assets are becoming worth less more quickly which gives less time for income to offset those expenses. That makes the company's expense:value ratio look worse. I don't think the answer is to say that everyone needs to follow a linear depreciation curve. Fancy, new tech depreciates much more quickly in its early years than well-established tech. So the basic concept seems to make sense in some applications and I would assume Tesla has some pretty fancy tech that they're investing in. On the other hand, this area feels a little fishy to me because a more accelerated curve limits the ability for a government to effectively apply taxation to companies during their administration. If companies were able to instantaneously depreciate their assets for 100%, assuming investors were OK with it, they'd just do that whenever the political winds blew in their favor for maximum savings. It doesn't seem like there's any perfect, one size fits all solution. Accelerated depreciation seems fine, and can reflect the reality of investing in certain tech, but can also be abused by giving companies the ability to cash in when the time is right.
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AnthonyMouse 2y ago
The way depreciation works is that a company buys something, like a computer, which is a business expense. Then at the end of the year, you're out the $2000 that you paid, but you still have the computer, which is now a used device and is now a year older. So it's no longer worth $2000 but it's not worth nothing. Suppose it loses $500 in value. Then the book value of the asset becomes $1500 and you have depreciation expense of $500. That depreciation is the deduction for this year, they don't let you deduct the whole $2000 the year you bought it. Next year you can deduct some more, until the book value of the asset is scrap or you dispose of it or sell it. Estimating how much value it lost is subjective so the government specifies what percent of the value you can deduct each year. Straight line deprecation is when the depreciation expense is the same percentage of the original cost every year. Accelerated depreciation is when the early years use a higher percentage than the later years. In both cases the total amount of depreciation is the same but accelerated depreciation is often a better approximation for actual value. The true market value of a piece of equipment will decline more in absolute dollars in the first year than the fourth year. It's also what businesses typically pick when given the choice, because a bigger deduction now is better than a bigger deduction later. It's not any kind of tax dodge at all, it's just an accounting method in the tax code.

SeanAnderson 2y ago

That makes sense, thanks. Inflation makes debt cheaper to pay off in the future and transitioning into a right-leaning government hints at corporate tax rates being more favorable in the future. I guess the caveat here is that it can be adversarial to short-term investors since the businesses assets are becoming worth less more quickly which gives less time for income to offset those expenses. That makes the company's expense:value ratio look worse. I don't think the answer is to say that everyone needs to follow a linear depreciation curve. Fancy, new tech depreciates much more quickly in its early years than well-established tech. So the basic concept seems to make sense in some applications and I would assume Tesla has some pretty fancy tech that they're investing in. On the other hand, this area feels a little fishy to me because a more accelerated curve limits the ability for a government to effectively apply taxation to companies during their administration. If companies were able to instantaneously depreciate their assets for 100%, assuming investors were OK with it, they'd just do that whenever the political winds blew in their favor for maximum savings. It doesn't seem like there's any perfect, one size fits all solution. Accelerated depreciation seems fine, and can reflect the reality of investing in certain tech, but can also be abused by giving companies the ability to cash in when the time is right.

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AnthonyMouse 2y ago

The way depreciation works is that a company buys something, like a computer, which is a business expense. Then at the end of the year, you're out the $2000 that you paid, but you still have the computer, which is now a used device and is now a year older. So it's no longer worth $2000 but it's not worth nothing. Suppose it loses $500 in value. Then the book value of the asset becomes $1500 and you have depreciation expense of $500. That depreciation is the deduction for this year, they don't let you deduct the whole $2000 the year you bought it. Next year you can deduct some more, until the book value of the asset is scrap or you dispose of it or sell it. Estimating how much value it lost is subjective so the government specifies what percent of the value you can deduct each year. Straight line deprecation is when the depreciation expense is the same percentage of the original cost every year. Accelerated depreciation is when the early years use a higher percentage than the later years. In both cases the total amount of depreciation is the same but accelerated depreciation is often a better approximation for actual value. The true market value of a piece of equipment will decline more in absolute dollars in the first year than the fourth year. It's also what businesses typically pick when given the choice, because a bigger deduction now is better than a bigger deduction later. It's not any kind of tax dodge at all, it's just an accounting method in the tax code.