Whatchamacolumn: Primary directive: Make life complex

If you think your taxes are complicated, try analyzing the rules of business depreciation.

Depreciation is on-paper expense taken over time for capital investments in buildings, equipment, vehicles, softwares, etc. It reduces net income and cuts taxes, but is one of the most complex and least understood elements of business finance.

The rules change so often that even accountants roll their eyes and dive for updated tax codes before giving advice. Knowing every rule isn’t enough because depreciation-based tax planning depends on myriad details of business type, profit level, owner income and more.

In its simplest form, depreciation spreads on-paper expenses over five years for vehicles, computers and machinery; seven years for office furniture and fixtures; 10 years for water transportation equipment and some agricultural buildings; 39 years for other buildings.

Rest assured, nothing to do with depreciation is in its simplest form.

There is “bonus depreciation” that long allowed expensing 50 percent of defined capital costs in the first year. That jumped to 100 percent in 2017, but this year began a five-year phase-out toward zero in 2027. A current bill in Congress seeks to retain 100 percent bonus depreciation for three years.

There is “Section 179,” which currently allows 100 percent first-year depreciation on capital investments up to $1,160,000. However, that benefit begins shrinking when a company makes $2.8 million in capital investments, disappearing completely after $4 million. For now, bonus depreciation still would apply.

Those basics, of course, cover a mountain of convoluted circumstances and rules that keep CPAs up late at night. But here’s one example of dramatic impact with accelerated depreciation:

A pass-through company — partnership, LLC, S-Corp. — uses its $1.5 profit to purchase a $1.5 piece of equipment that has 100 percent first-year depreciation. That eliminates pass-through income to wealthy Oregon owners, who might have paid up to $700,000 in taxes. Those owners thus forgo $800,000 in current net gain in hopes of doing better over time through use of their company’s $1.5 million investment.

The major catch-22 in complex depreciation policy is that it even exists. Many believe America’s manufacturing sector is greatly hindered by its inability to deduct full cost, every year, of all capital investments in structures, equipment, and research and development.

Imagine the wave of simplicity that would wash over all American business ventures if owners could expense every capital cost when incurred. Period. With any resulting losses carried forward against future income.

That, of course, would violate the primary directive of government to maximize the complexity of our lives.

Jeb Bladine can be reached at jbladine@newsregister.com or 503-687-1223.