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No tax break to move jobs overseas

By: Frederick (Diary)  |  October 3rd, 2012 at 11:06 PM  | 

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I’m tired of hearing that companies get a “tax break” for moving jobs overseas. The President repeated this a couple of times during his dabate with Mitt Romney. I’ll buy dinner up to $500 for the first person to show me the section in the tax code that does this.

Don’t bother, it doesn’t exist.

Here’s what they’re really talking about (very simplified):

It’s 1992. A business builds a new facility in the US for $30 million. They don’t report a $30 million dollar expense on their financial statements, but rather record a $30 million investment (the “book” value) and record the expense of the investment over a period of time, say 30 years (a normal practice under Generally Accepted Accounting Principles or “GAAP”).

This is called “depreciation”. For the next 30 years, the company will deduct $1 million per year to account for the expense of investing in this facility. Accountants like to explain that they’re accounting for the reduction in the value of the asset (“depreciating” the asset and reducing book value), but what they’re really doing is covering the cost of the investment over time instead of all at once.

Now it’s 2012. The facility isn’t making money. Maybe it’s outdated. Maybe labor costs are too high. Maybe regulations are too strict. Maybe the facility is just badly run. Maybe all of the above. It doesn’t matter why. So the company decides to move the facility overseas to save money.

The facility is still worth $10 million on the books, meaning they’ve depreciated $20 million of the original cost of the building. Maybe they can only sell it for $8 million. Or maybe they can’t sell it and just close it entirely. In any case, the company has to state the difference between what it’s worth on the books (its depreciated book value) and what they sold it for (its “market value”) as a loss on their financial statements. This is required by both GAAP and by law. If they didn’t do this, they’d be fined by the Securities and Exchange Commission for not reporting the loss.

Alternately, say the company gets $12 million for the facility that’s “worth” $10 million. They must now record a financial gain from selling it for market value over book value and pay more taxes. That’s not what happens in this case. In this case, facility is a total loss.

So, before they closed the facility, the company would have made $20 million and would have paid $7 million in taxes. Now the company closes it entirely and reports the $10 million loss. So instead of reporting $20 million of income, the company reports $10 million of income and pays $3.5 million in taxes. According to some, that $3.5 million difference in taxes paid is a “tax break” for moving jobs overseas.

Losing $10 million is one ugly way to get a “tax break”. It’s a false narrative and those who push it depend on your ignorance of basic accounting.

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COMMENTS

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  • Kaia

    http://www.politifact.com/rhode-island/statements/2010/nov/21/sheldon-whitehouse/whitehouse-says-companies-get-tax-break-moving-job/

    • Dave_A

      Politifact is, as usual, wrong.

      • tnfriendofcoal101368

        or even to be charitable in reading that article went to the AFL-CIO instead of an accountant – which means they are either dishonest or incompetent – either way works for me.

      • http://www.facebook.com/edwardsavagejr Edward Anthony Savage Jr

        Please elaborate.

        • streiff

          eh? Politifact is a Democrat front group.

        • Bill S

          Based on that handy link to your Facebook page, I seriously doubt you are interested in elaboration.

    • Frederick

      I dispute nothing in this article… Except their conclusion. It’s an expense, not a tax break. They call it a “tax write-off” to make it sound better to investors and executives, but in reality it’s just an expense like any other, reducing EBIT and therefore taxes paid.

      • Don_H

        I own a house which I rent out. I have expenses. The government gives me a break on my taxes by allowing me to deduct any expenses on the items I need to maintain MY property. This gift that I get is called, in short, a tax-break.

        • streiff

          you can call it that, but then you’re calling everything from the personal deduction to charitable contributions to home mortgage deduction a “tax break.” Not sure how useful that is. Expenses associated with running a business are not, in English anyway, a tax break. They are a deduction. But call them whatever you like if it makes you happy, just know people are laughing behind your back.

        • Bill S

          Tax rates are structured with the knowledge that there are deductions. The net tax paid is what counts. Those “breaks” are part of a bigger picture. They aren’t “gifts” – they are a part of an overall tax code that is built to encourage some behaviors and discourage others. People need to pay attention to the net taxes paid and not the marginal rates, which mean pretty much nothing.

      • http://www.facebook.com/terry.lambert.9699 Terry Lambert

        If seems as though you are confusing the difference between an “expense” (an accounting term) versus a tax break (i.e. tax deduction which is a tax law term) . IRC section 61 provides that Congress has the power to tax “all income from whatever source derived”. This is important because it is only through writs of Congress that we are allowed any deductions. There are numerous accounting expenses that are not allowed as tax deductions and many tax deductions that are not accounting expenses, so to assume that you should be entitled to a tax deduction for an accounting expense is unlawful. Therefore, Congress has provided a tax break for any company that moves its operations and could (and maybe arguably should) take this tax break away from companies that move its operations overseas. As far as I can tell this article is correct.

  • Dave_A

    Romney called him on it during the debate, too… ‘That doesn’t exist’.

  • Jame Tabares

    Thank you for explaining this in a way that the non businessmen can understand. It is very important this year that we are informed

  • http://www.facebook.com/people/Clint-Harris/1214228926 Clint Harris

    So you can’t take a deduction for moving expenses???? Hmmm… I know you are wrong about that.

    • streiff

      depends on 1) distance and 2) whether your employee reassigned you or you simply moved to take another job.

    • Frederick

      It can depend on how the company records those moving expenses.

      1) Some may capitalize them (that is, they would amortize it over time, similar to depreciation).

      2) Others simply expense them (direct hit to net income).

      3) Sometimes, it has to do with how much the move costs. A $5,000 move, for most companies, would most likely be expensed, but a $2 million move would most likely be capitalized.

      There are other factors, as Strieff mentions. As long as the company is consistent over time with how they do it, any of these methods is valid.

  • Sam

    Sorry, but Frederick is using a totally different part of the tax code (depreciation) to falsely assert that companies do not get tax breaks for moving factories overseas. The fact of the matter is that when companies move their manufacturing equipment overseas (and thus, jobs) they get to deduct those expenses. Frederick (and more importantly Romney,) are just plain wrong.

    • http://www.facebook.com/people/Robert-Allen/1933626 Robert Allen

      Moving expenses would be deducted no matter where you move. So there’s no special tax break for moving overseas. Also, moving expenses are relatively small compared to other expenses, so this isn’t really an important incentive. My company just started moving operations to China. The incentive is lower cost of labor. Whether or not the moving expenses are taxed is not a factor in the decision. The way Obama plays it up, it sounds like we have special tax breaks designed to encourage offshoring. That’s totally inaccurate.

    • tnfriendofcoal101368

      Are you suggesting companies should not account for all of their expenses on their balance sheets? If the answer is yes, I am going to take all of my cash out of the stock market, out of my 401K and put it in a coffee can and bury it in the backyard. In addition, in the name of fairness, we should petition that Jeffrey Skilling and Bernie Ebbers be released from prison since you wish to legalize the very practices for which they are doing time (i.e. mistating the profitability of the enterprise).

    • Frederick

      Truly, you have a dizzying intellect.

      There’s no “tax break”. It’s, “We spent money. This lowered our net earnings. We pay taxes on net earnings.” It’s no different than if they spent more money on raw materials. It’s not a “tax write-off”.

      And they’d get the same “write-off” for moving the jobs to another state.

    • Frederick

      KOWALSKI:

      Also, I’m not talking about depreciation as the tax break. That’s simply how a $30 million building ends up being “worth” $10 million 20 years later. I’m talking about the financial loss recorded from the balance sheet to the P&L when the asset is written down as having reduced or no value when thr facility is closed. That’s a legitimate financial cost that the company is required to report. If it doesn’t, then the company has falsely stated its earnings, and that gets them in legal trouble. This has the side-effect of lowering their tax burden that year, but that’s not a “tax break”.