That's how I see it, but clearly there are many people complaining about these deductions by oil companies.

But didn't you say that investment in drilling equipment could be further written off ? I may have gotten the wrong end of the stick here, but my reading of what you were saying is that an oil company can invest in this equipment, which would be a direct cost that would hit the bottom line and reduce profits, leading to a smaller tax liability, and then further reduce their liability by offsetting the cost of the equipment against the resulting tax bill. If that's the case then surely it does count as a subsidy.

I can understand a company being able to make certain deductions for depreciation, but that (assuming I haven't misunderstood) does seem like a different thing altogether.

Sassenach wrote:

That's how I see it, but clearly there are many people complaining about these deductions by oil companies.

But didn't you say that investment in drilling equipment could be further written off ? I may have gotten the wrong end of the stick here, but my reading of what you were saying is that an oil company can invest in this equipment, which would be a direct cost that would hit the bottom line and reduce profits, leading to a smaller tax liability, and then further reduce their liability by offsetting the cost of the equipment against the resulting tax bill. If that's the case then surely it does count as a subsidy.

I can understand a company being able to make certain deductions for depreciation, but that (assuming I haven't misunderstood) does seem like a different thing altogether.

Just once. I'm talking about 2 different types of costs. The first is intangible drilling costs which represent expenses associated with manpower, chemical and other non-equipment costs when prospecting for oil or gas. These can be written off right away. Then there is the cost of all of the equipment (tangible drilling costs) for when they are successful; this equipment is generally written off over 7 years. They don't get double deductions.

ray

How quickly should oil and gas exploration machinery be written off? That's a very different animal than let's say paying an Illinois company $1 billion to research clean coal. Do you really not see the difference?

I do. One, the former, is an ongoing tax advantage. In the cast of oil companies they've been able to amortize expenses more quickly than other industries, since the tax code was written. There seems to be no justification for it other than, thats the way we do it....
The second is a specifically targeted investment that hopes to deliver something that can provide a significant improvement to the US economy. (In the case where this might be more of a "state enterprise" the tax payer could reap a more direct benefit from the success of the venture.)
As I said before about Frakking, the subsidy for that specific production technique ended in 2000, after Frakking had proven itself as a major contributor to creating natural gas production in the US. Its a great example of a successful limited time subsidy.
The oil and gas tax law has endured since the beginning of the tax code. For a mature industry that is so enormously profitable, this seems egregious.

The code now allows independent oil companies -- mid-sized competitors such as Marathon Petroleum Corp and Occidental Petroleum Corp -- to recover 100 percent of intangible drilling costs in the first year.
The largest oil companies -- including the "Big Five" players Exxon, Chevron, BP Plc, ConocoPhillips and Royal Dutch Shell Plc -- can recover 70 percent of these costs in the first year

.
http://news.yahoo.com/factbox-big-tax-b ... 17512.html

I'm still confused. Corporation tax is against profit. If they are already paying for the intangible costs (not sure how they are intangible if they are known at the point, but hey, legal accounting definitions can be screwy), that will already be part of their revenue spending. So how are they also a write off without being counted twice?

The only way I can think it works is if any taxes they paid on these costs are counted as credits for corporation tax. Which to me is still kind of a subsidy.

can you show us a worked example of how these write-offs work?

I drill for oil. In the first year, I spend $100; $65 is for people and chemicals; $35 is for equipment. In the first year, I get a deduction of about $70; in each of the next 6 years I get a deduction of about $5. (It's more complicated than that, but I'm illustrating the concept.) In total I spent $100 and I get deductions of $100. There's no double dipping going on here.

Ricky:

One, the former, is an ongoing tax advantage. In the cast of oil companies they've been able to amortize expenses more quickly than other industries, since the tax code was written. There seems to be no justification for it other than, thats the way we do it....

Why do you say it is more quickly than other industries? Race horses and breeding hogs, and rental furniture is 3 year property; tractors are 3 years; cars and computers and trucks and technology equipment and semi conductor manufacturing equipment and geothermal, solar and wind energy properties are 5 years (what, favoritism for alternative energy -- where's the outrage?), and biomass property is 5 years.

Airplanes, and furniture, and fishing vessels, and some livestock and breeding horses, and railroad tracks are over 7 years. Just like oil and gas exploration equipment.

Ricky, why don't you do some research instead of pretending like you know what you are talking about! Your embarrassing yourself over and over again.

(By the way, there are some favorable tax rules related to oil and gas companies. They are somewhat esoteric and relate to the alternative minimum tax, and passive loss rules, and small producers. But they are the same for oil as for gas.)

ray

Why do you say it is more quickly than other industries?

Because it is. I did some research before I made the claim. ..
You've started an obvious.
Amortization of a durable product is longer. You note that it is 7 years for airplanes or rail road tracks.
A race horse has a short career.... Hence the IRA allows it to be amortized over a realistic life span. (Same with cars and computers)
The average age of the deep sea oil rigs in the Gulf Coast right now is over 20 years. Which suggests they are durable.
Which suggests that the short amortization period for oil drilling equipment was an artificial construct...

On the other hand:

DOMESTIC ACTIVITIES DEDUCTION

Many big U.S. companies are entitled to a 9 percent tax deduction from their income from property manufactured, grown, extracted or produced in the United States.
Oil companies can claim a 6 percent deduction for this.
Critics say oil production is not manufacturing, and the oil industry does not need the deduction with oil prices so high.
The oil industry counters that taking the benefit away from it alone puts the government in the business of picking winners and losers.

A race horse has a short career.... Hence the IRA allows it to be amortized over a realistic life span.

Tell that to Shergar...

Dan will get it.

rickyp wrote:ray

Why do you say it is more quickly than other industries?

Because it is. I did some research before I made the claim. ..
You've started an obvious.
Amortization of a durable product is longer. You note that it is 7 years for airplanes or rail road tracks.
A race horse has a short career.... Hence the IRA allows it to be amortized over a realistic life span. (Same with cars and computers)
The average age of the deep sea oil rigs in the Gulf Coast right now is over 20 years. Which suggests they are durable.
Which suggests that the short amortization period for oil drilling equipment was an artificial construct...

Ricky, all tangible non-real property is under accelerated depreciation in the US; it's been that way since the 1970's. Since the 1980's it's called the Modified Accelerated Cost Recovery System. Airplanes also last longer than 20 years. Under the IRS rules, if the property is expected to last between 10 and 16 years, it is assigned a 7 year life. Office equipment, desks, files and safes are all considered 7 year property although many of these items will last much longer. There's nothing special hear for the oil industry. I'm sure some oil equipment lasts longer than 16 years, and I'm sure other equipment last less than 10 years. But the IRS/Congress did this many years ago to simplify our tax rules. All depreciation in the US is accelerated (except real estate).

By the way, you are the master of argument creep, in both senses of the word. You talked about all sorts of subsidies for oil and gas, and then we analyzed them and discovered that you weren't really cognizant of the issues in that it included home heating assistance for low income people which is a Democratic Party program, and that it included an exemption from oil and gas taxes for farmers because they don't use the roads that the excise tax money is for (which is supported by both parties and not a break for big oil anyway), and that the analysis included state subsidies, and more for gas than for oil. Then you stated oil is receiving benefits that are better than gas, but I've explained that they are under the same rules; then your argument was that oil is receiving better treatment than alternative energy, but we learned that solar and wind enjoy 5 year depreciation (which is a much shorter time period than the windmills and solar panels should last, or at least that's what they tell us). But you can't be bothered to acknowledge that. Now you are looking for new arguments by bringing up DPAD. Is that really what you were talking about all along, or are you throwing more spaghetti against the wall?

Hmm, Bain is really where the President wants to fight the economy? This is "what this campaign is going to be about?"

Okay.

This is a killer response to the distorted ads the President's campaign ran against Romney.

Sassenach wrote:

A race horse has a short career.... Hence the IRA allows it to be amortized over a realistic life span.

Tell that to Shergar...

Dan will get it.

I always figured that 'amortisation' was into dog food.

You are thinking of liquidation.

Oh no, dogs like their meat chunky.

For those who may have missed the reference btw, Shergar was a famous racehorse that was kidnapped in the 1970s and never seen again. He was widely believed to have been taken by the IRA.

I'm pretty sure Ricky meant to say 'IRS'....

Sassenach wrote:For those who may have missed the reference btw, Shergar was a famous racehorse that was kidnapped in the 1970s and never seen again. He was widely believed to have been taken by the IRA.

Winning the Derby in '81 by a record 10 lengths was an even bigger feat than I thought!



(he was kidnapped in 1983)

You mean I cannot agree with RickyP? I thought he mean the IRS was a terrorist agency. Dang... We were that close to a Kumbaya moment, RickyP.