Wednesday, August 3, 2011

An explanation of the "Corporate Jet Tax Break for the Wealthy". Some workers who make and service these will lose their jobs, but Congress needs that money to create jobs..What is so hard to understand??

The tax benefit that corporate jet owners (i.e. the "rich") receive has been part of the Presidents speeches lately.  It SOUNDS bad, but what is it, exactly?

It is all about the rate at which a corporation can depreciate the cost of the jet for tax purposes.  Currently jet owners can depreciate the cost of a jet over 5 years. The owners of a charter jet used for charters depreciate over 7 years. These depreciation rates were CONTINUED under the fiscal stimulus plan of 2009 (the Pres plan).  Simple example:

Company "A" buys a $10 million jet for corporate use. Say, NBC purchases a jet to fly the cast of Seinfeld to Paris, France.  For taxation reasons, NBC can depreciate the value of the jet over 5 years,  In other words, it can subtract $2 millon ($10M/5) from its taxable income for 5 consecutive years. It simply spreads the cost of the jet over a 5 year time period.

Company "B" buys a $10 million jet for charter purposes. Say, Hayward Air is going to contract out to a travel company to take people to private islands.  For taxation purposes, Hayward Air can depreciate the value of the jet over 7 years. In other words, it can subtract $10M/7 = $1.43 million from its taxable income for 7 consectutive years. It simply spreads the cost of the jet over a 5 year time period.

In Year 1, "A" deducts $2M and "B" 1.43M. "A" will have less taxable income in Year 1.  "A" will pay LESS in corporate taxes than "B" in Year 1, and will have a higher immediate cash flow relative to "B".

The advantages of a faster depreciation schedule: (1) a company on the edge of deciding to buy a jet, may go ahead and do it if they can get more of an immediate tax advantage which translates into increase cash flow. (2) If a company exhausts the depreciation allowance in a shorter time span, they may give them an incentive to sell the used jet and then upgrade/replace. (3) Many/Most corporate jets are made in the USA and provide lots of high skill, hence high paid jobs. The planes are parked somewhere and serviced as well.  The jobs created are very "seen". 

Companies can expense, through depreciation, all sorts of qualifying capital equipment but it does not receive the scorn of politicians.  Corporate jets do serve a function--they are a piece of capital-- but we have a preconceived notion of the type of person who uses one and their motives for doing so. 

The administration estimates eliminating this deduction will bring in $3 billion in tax revenues over 10 year, or $300 million per year. 

The savings are small relative to what needs to be cut in the Federal budget, but the populist sound of the message "greedy corporate jet owners" is, well, supersonic boom-like...

Having said all this, the deduction has to be eliminated.  Some workers who make and service them will suffer, but the larger picture of soothing the populist beast must take precedent.  The politics is more important at this point than creating (or maintaining) jobs.

To make it clear, I am NOT defending "greedy corporate jet owers"...However, I would defend the workers who make, service, fly or otherwise are employed in the private aircraft business because of the existence of  thoses, "greedy corporate jet owners"...Why is that so hard to understand???
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