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Monday, December 09, 2002

A Quick Primer on Deprecation Saw the first salvo from the left on the Snow nomination over at Josh Marshall’s
Turns out Snow's company, CSX, also has some pretty good tax attorneys. In three of the last four years, according to this press release from Citizens for Tax Justice, CSX paid no federal taxes even though it showed a profit in each of those four years.
Financial statement accounting differs from tax accounting. For financial statements, you take depreciation based on the expected life of the item. If the item is supposed to last 25 years, you'd write it off at a 4%/year clip. However, tax accounting, under the Modified Accelerated Cost Recovery System (MACRS), typically allows for a quicker write-off of assets; for instance, automobiles are written off in five years and most manufacturing equipment is written off in seven years. This will typically mean that companies can write off more deprecation for tax purposes than they can for financial statement purposes. This would then mean that a company can legitimately have net income on their financial statement and a net loss (due to the higher depreciation) on their tax form and thus no taxes. In this 2000 10-K report, CSX stated
Depreciation is provided using the composite straight-line method over estimated service lives. In 2000, the overall depreciation rate averaged 3.0% for all roadway and equipment.
However, railroad track, cars and locomotives are a seven-year items, tank cars are 10-year items and railroad structures are 20-year items. That would mean that CSX would be able to write off about 15% of their asset value a year; the tax difference between the 3% and 15% figures would show up on the books as deferred taxes. Thus, CSX might be legitimately paying no taxes, and even getting tax rebates if they are getting tax credits for certain activities. If the CTJ wants to cut depreciation and tax credits, fine, but calling Snow and others freeloaders for living under the tax code as written isn’t helpful. Is the person getting a refund via the Earned Income Tax Credit a freeloader? “No, because they’re the working poor and not a corporation.” However, they’re both working under the law as written.

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