Talk about playing small ball …
In Wednesday’s press conference, Pres. Obama turned the spotlight on the “tax loophole for corporate jets”. He mentioned them 6 times in the press conference.
Must be a big deal, right?
Wrong.
I’m not a big fan of corporate jets, but that’s beside the point.
I’m more intrigued by the numbers … and so far, I haven’t heard any pundits nail them.
First, what’s the “loophole”?
Well, corporate jets get depreciated over 5 years; commercial aircraft (like Southwest’s) get depreciated over 7 years.
The “loophole” is 2 years of accelerated depreciation.
Nobody seems to be disputing that corporate aircraft are deductible as a business expense.
The only question is whether the cost gets booked over 5 years or 7 years.
What’s the difference?
Well, let’s assume – for round numbers — that a jet costs $1 million.
If it’s a business jet, the company can deduct $200,000 for 5 years ($1 million divided by 5).; if it’s a commercial jet, the airline can deduct $142,857 for 7 years ($1 million divided by 7).
Note that the aggregate nominal deduction doesn’t change — it is $1 million in both cases. Just the depreciation period is different.
So, to figure the impact of the different depreciation periods, let’s calculate the NPV of the 2 depreciation streams (see table below) …
- A 5 year stream of $200,000 per year – discounted by 5% per year – has a $909,190 NPV.
- A 7 year stream of $142,857 per year – discounted by 5% per year – has a $867,956 NPV.
- The difference is in NPVs is $41,234.
But, $41,234 is the NPV of the tax deduction … not the NPV of the incremental taxes that the gov’t collects.
Assuming a 25% average corporate tax rate, the deduction has a tax NPV of about $10,000 ($41,234 times 25%) … about 1% of the plane’s purchase price.
Said differently, this Obama game-changer is equivalent to putting a 1% excise tax on new corporate jets.
That’s how Obama’s is going to attack the deficit ??? That’s his big idea ???
Geez.
Only upside I see is that one of Warren Buffett’s dreams will come true since NetJets — his corporate jet leasing company — will take a direct hit.
Maybe Buffett will stop whining about his taxes being too low.
Maybe.
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The Homa Files 