:lol: Nah, just saying I can understand how someone else could read it incorrectly. I could have worded it a little better.

 

My fault on that one. Wording was fine.

 

The key point is that his personal view differs from his stated view as a member of the administration.

The key point is that his personal view differs from his stated view as a member of the administration.

I would hope so.

I understand, that's how I feel about politicians.

 

:laugh: agreed!

I had to go look up these tax breaks and their impact to the companies.

 

This article looks it describes the issues pretty good though it is almost a year old.

 

Big Oil's $4B tax break in doubt as Obama, Boehner tangle - Apr. 26, 2011

 

So all the this drama is over $4B in 'tax breaks'. I assume that is across all companies. So what is that impact to the overall industry. Well Exxon is the largest in terms of revenue at around $486B a year. BTW - that is the most revenue of any company on the globe. 9 of the top 14 companies in terms of global revenue are - oil companies. List is here. Just using them it looks like the total annual revenue is around $2,500B ($2.5T). So just using these 14 companies the impact would be about 0.2% of their revenue (4B/2,500B). Talk about a drop in the bucket - or in this case - barrel. I am sure the companies want to keep their taxes as low as possible but even if these tax breaks went away I bet they would yawn.

 

What are the breaks? From article above:

 

Domestic manufacturing tax deduction: This is the largest single tax break, and would save over $1.7 billion a year if eliminated.

Percentage depletion allowance: This lets oil companies deduct about 15% of the money generated from a well from its taxes. Eliminating it would save about $1 billion a year.

The foreign tax credit: This provision gives companies a credit for any taxes they pay to other countries. Altering this tax credit would save about $850 million a year.

Intangible drilling costs: This lets the industry write off about $780 million a year for things like wages, fuel, repairs and hauling costs.

 

I am very confused over the phrase "save" above - save who? I think that is lib-talk for the government is due whatever it wants. But I am not sure.

 

The first two breaks do sound like gifts. As the article points out oil companies probably do not need incentives to stay in the US. And the 2nd break allows companies to treat oil as a capital resource and take a depreciation on it when it is extracted. That sounds like a very dubious accounting trick since there was no 'capital' involved in putting the oil in the ground. So those two items are certainly fair game.

 

I am not sure about the foreign tax credit thing. Sounds like more accounting gimmicks with an international flavor.

 

The last items on taking drilling operations as immediate write downs sounds sound - unless companies drastically cut or greatly reduce new drilling operations. Since drilling operations are ongoing each year amortizing these cost over time does not make sense. The costs are real and the impact to taxes sounds normal. It is true that companies often treat all the cost of an investment - like a new oil well - as a capitalized cost and spread it out on the books so that that impact of the cost is spread over the life of the investment. But you should not 'have' to spread out the costs on the books. With ongoing exploration and drilling this truly is more of an expense than an investment. If you do the 'normal' thing future taxes paid by oil companies WILL go down since the wave of depreciation will build every year to where - on the books - they are not making any money. But most liberal politicians and journalists do not seem to understand basic accounting so this probably looks good them.

 

Given the total impact to companies and the likely complete non-impact of the profits and the tax breaks to the actual cost of gasoline this is - once again - worthless and distracting political drama. I am not happy about gas prices at all. But ranting about tax loop holes that are minuscule and actually eliminating a couple of them that look bogus will not reduce our price at the pump one single bit. So this does nothing to actually address the real issue and the issue makes most of us mad.

 

BTW - the deficit in fiscal 2010 was $1,170B. So if these loopholes are all closed it will help reduce the deficit - to only $1,166B. Talk about another drop in the bucket.

 

Sorry for the long post but this is an issue that drama and nothing more.

Quick question, bluegrass....on the last break....do any other types of industries get to write off wages and other costs of doing their business? Not a sarcastic question. I don't understand how that would be kosher. Wouldn't that be akin the government paying those wages and costs? And wouldn't that make it more a government agency than a private business?

Quick question, bluegrass....on the last break....do any other types of industries get to write off wages and other costs of doing their business? Not a sarcastic question. I don't understand how that would be kosher. Wouldn't that be akin the government paying those wages and costs? And wouldn't that make it more a government agency than a private business?

 

The easy answer is yes. Remember that companies pay taxes on earnings or what is usually labeled as 'profits'. So anything you can count as cost will reduce your profit and thus reduce your taxes owed. The accounting gimmick is how the costs 'are applied to the books'. If you buy a 'capital' asset (usually something over $1,000) you are supposed to 'depreciate' it over the expected life of the asset or for a set period if the asset will last a long time - like an oil well.

 

So the simple scenerio is let say I need to buy something that cost $1M and with that thing I expect to make $1M a year for 5 years. Without the depreciation requirement I could spend the $1M then make $1M in the first year. My taxes will be 0 since my profit will be 0 the first year. But the next 4 years profits will be $1M a year and assuming a 20% tax rate the taxes owed would be $200K for 4 years for $800K in taxes. But if the asset will be used for 5 years you have to spread the cost over that time frame. So 'on the books' it shows as $200,000 per year in cost and then profit is $800K a year and taxes are $160K a year for 5 years for (also) $800K in taxes. In both cases the actual money flowed the exact same way. But the accounting function spreads the 'recognized' cost of the original investment. Notice that the taxes paid are the exact same - except for timing.

 

Accounting and tax rules make companies account for equipment in a manner such as above. Salaries and other non-equipment expenses are sometimes in the gray area. When software is written the salaries and travel costs, etc. of the project to create the software are 'capitalized'. That is they are treated like the equipment above and spread out over time. Capitalization of these type cost is tricky and can require judgment calls.

 

In the case of the oil companies and the cost of oil exploration here is the deal. They are always building new wells and doing things that will provide value over time. But since they are doing it every year on an ongoing basis it makes sense to 'recognize' the cost immediately. Because to be in the oil production business you need to be continually 'investing' in capital resources - oil wells, oil platforms, etc. If a company puts in 20 new wells every year for 20 years and the life span of the oil well is 20 years you are going to have keep track of all the $1,000+ parts that went into each oil well for 20 years - and the labor and the other expenses that would normally be capitlized. Eventually you are tracking and taking depreciation that builds every year on 400 oil wells - along with varying labor and other costs that need to be tracked during the period of depreciation. That would take an army of accountants to manage and another army to audit.

 

Remember the 'tax break' is nothing more than timing of when you recognize the cost 'on the books'. Talk about a windfall. If you did away with this rule profits would jump immediately but then erode over time due to the increasing depreciation cost that would build up. That is the 'wave of depreciation' I mentioned in the first post. Eventually there would be so much depreciation on the books that the companies would owe no taxes since - on the books - they would not be profitable. In a business that is continually building capital infrastructure every year this accounting approach makes sense. It is unique. But it is not a 'tax break' in that taxes are being avoided at all - it is a timing and the easiest thing for everyone is to just take the cost of this constant building as an 'expense' so that it is on and off the books in one shot and not spread out for 20 years. This is not ill-gotten money or not paying owed money. It is timing.

 

I hope this make some sense. Accounting sounds mystical but its not too hard after getting used to the concept of 'capital' and 'expense' and how they can be interchanged 'on the books'.

 

There is a joke about accountants - When you ask an account what 2+2 is here is how they will usually answer....'what do you want it to be?'