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 
July 1, 2011 at 8:58 am |
Afraid a midsize jet is going to cost you more like USD 10 million. I also recall that Obama signed a law allowing you to depreciate 100% of the value of any new jet bought in 2011 IMMEDIATELY! (I think this is known as HR 4853… but please check with your personal tax advisor before you go out and buy!)
July 1, 2011 at 11:04 am |
It’s about time the government actually starts sticking it to the fat cats — however minimal/incremental the changes may be. It won’t kill these overpaid, pretentious execs to fly first class instead of in their own jet. It’s like Dick Fuld having his own private elevator to his penthouse office at Lehman, so he wouldn’t have the risk seeing any commoners on the two-minute trip from his limo up to his office. Executive comp and perks are completely out of control I support doing anything possible to rein them in.
July 5, 2011 at 6:41 am |
[…] We said that the “loophole” was that corporate jets get depreciated over 5 years, whereas commercial aircraft (like Southwest’s) get depreciated over 7 years. So, the “loophole” is 2 years of accelerated depreciation … which is monetarily equivalent to about a 1% discount on the purchase price of of the jet. See the original post for the analysis. […]