Lets talk about Corporate tax loopholes

[BridgeTroll]

We hear alot about them... but what are they?  If they are so onerous... why do they exist?  Who created them and why?  What are the solutions or changes to be made?

I will start with... What are they?  I am certainly no tax expert so I am learning on the fly... and hopefully from non partisan sources... though that seems pretty difficult as most articles are one sided and highly political in nature.

http://www.thefiscaltimes.com/Articles/2011/02/09/10-Big-Corporate-Tax-Breaks.aspx#page1

By SARAH STODOLA, The Fiscal Times
February 9, 2011

U.S. corporations â€" like many Americans â€" exploit every available rule in the tax code to minimize the taxes they pay. The United States has one of the highest corporate tax rates in the world, at 35 percent (not including any state levies), yet the actual amount in corporate taxes that the government collects (“the effective tax rate”) is lower than those of Germany, Canada, Japan and China, among others. The reason is confusingly called “tax expenditures,” a doublespeak term designed to legitimize special interest tax breaks and loopholes.

Those ‘expenditures’ will cost the U.S. government $628.6 billion over the next five years, according to a 2010 report from the Tax Foundation.  With advice from the Urban Institute’s Eric Toder, one of the country’s foremost authorities on corporate tax policy, we assembled the 10 most costly corporate tax loopholes and who benefits from them.

10) Graduated Corporate Income
This policy places the first $50,000 of a corporation’s profit at a 15 percent tax rate, with higher profit levels garnering higher tax rates, until it tops out at 35 percent for taxable corporate income exceeding $335,000. The result is that an owner of a small corporation pays only 15 percent in taxes on the first $50,000 of profit, leaving more left over potentially for reinvestment and growth.
5-yr Cost to Government (2011-2015): $16.4 billion
Who benefits: Individuals that own small corporations.

9) Inventory Property Sales
Foreign income of American companies is taxed in the country in which it is generated, and the U.S. gives a tax credit for that amount in order to avoid double taxation. Some companies have accumulated a glut of such tax credits (the “inventory”), and in order to use them up, they artificially boost foreign income through a “title passage rule” that allows companies to allocate 50 percent of income from U.S. production sold in another country as income generated by that foreign country (the “property sales”).
5-yr Cost to Government: $16.7 billion
Who benefits: Multinationals with operations in high-tax foreign countries.

8 ) Research and Experimentation Tax Credit
Intended to spur research and development within companies, in its simplest form this break allows for a 20 percent tax credit for “qualified research expenses.” There are more complex applications, as well. Detractors complain that it is paying corporations to do research they would have done anyway.
5-yr Cost to Government: $29.8 billion
Who benefits: Pharmaceutical companies, high tech companies, engineers, agriculture conglomerates.

7) Deferred Taxes for Financial Firms on Certain Income Earned Overseas
Because most financial firms conduct their foreign operations as branches rather than as subsidiaries, as most companies in other industries do, they do not benefit from the tax breaks afforded to foreign subsidiaries. To compensate, this loophole enables financial firms to treat income from their foreign branches as if they were subsidiaries, along with all of the attendant tax benefits.
5-yr Cost to Government: $29.9 billion
Who benefits: Any financial firm with foreign operations.

6) Alcohol Fuel Credit
This is a tax credit for the production of alcohol-based fuel, most commonly ethanol, which is made from corn. The credit ranges from $0.39 to $0.60 per gallon. In theory, the credit is meant to encourage alternative forms of energy to imported oil. It is largely responsible for propping up the price of corn, and is extremely popular in corn-producing states like Iowa and Illinois.
5-yr Cost to Government: $32 billion
Who benefits: Food and agricultural conglomerates in the Midwest.

5) Credit for Low-Income Housing Investments
As you might expect, this one gives tax breaks to companies that develop low-income housing. It’s the rule that’s responsible for so many larger new developments setting aside 20 percent or 40 percent of their units for people whose income is well below the area’s median gross income.
5-yr Cost to Government: $34.5 billion
Who benefits: Real estate developers.

4) Accelerated Depreciation of Machinery and Equipment
This one allows companies to deduct for all of the depreciation of a piece of equipment at once (as opposed to over the, say, 20 years it actually takes the item to depreciate). This is the equivalent of the U.S. government giving the company an up-front, interest free loan. Congress recently made this expenditure temporarily even larger for 2011, to encourage investment in equipment.
5-yr Cost to Government: $51.7 billion
Who benefits: Airlines and manufacturers using large equipment that lasts many years.

3) Deduction for Domestic Manufacturing
This loophole enables a tax deduction for manufacturing activities conducted by American companies within the United States. It covers conventional manufacturers, but also extends to industries like software development and film production. The intent is to keep manufacturing from being outsourced.
5-yr Cost to Government: $58 billion
Who benefits: Any U.S. company that produces a product within U.S. borders.

2) Exclusion of Interest on State and Local Bonds
Companies (and individuals) do not pay federal income tax on interest from their investments in state and municipal bonds. What’s more, private companies can in some cases issue tax-free bonds of their own for projects that benefit the public, such as construction of an airport, stadium or hospital.
5-yr Cost to Government: $59.8 billion
Who benefits: High-income investors and corporations.

1) Deferral of Income from Controlled Foreign Corporations
Multinational companies can defer paying U.S. income taxes until they transfer overseas profits back to the United States, under this law. In practice, many companies leave much of their profits overseas indefinitely, thus paying only the tax in the relevant foreign country, which is likely far lower than the U.S. rate, and avoiding U.S. taxes permanently. The list of corporations enlisting this loophole is seemingly endless.
5-yr Cost to Government: $172.1 billion
Who benefits: Every multinational company.

[JFman00]

You can add to that the benefits of filing jointly, the benefits from having kids, and the mortgage interest tax deduction. Everything's a kickback until you're the one receiving it.

[NotNow]

FAIR TAX!

[BridgeTroll]

There appear to be many good reasons for tax loopholes and some of our presumptions may be wrong... for example... I found this pretty intersting...

The average total tax rate for the 500 companies over the last five years â€" again, including federal, state, local and foreign corporate taxes â€" was 32.8 percent. Among those paying more than the average were Exxon Mobil, FedEx, Goldman Sachs, JPMorgan Chase, Starbucks, Wal-Mart and Walt Disney.

http://www.nytimes.com/2011/02/02/business/economy/02leonhardt.html?_r=2&src=me&ref=business

The Paradox of Corporate TaxesBy DAVID LEONHARDT
Published: February 1, 2011

The Carnival Corporation wouldn’t have much of a business without help from various branches of the government. The United States Coast Guard keeps the seas safe for Carnival’s cruise ships. Customs officers make it possible for Carnival cruises to travel to other countries. State and local governments have built roads and bridges leading up to the ports where Carnival’s ships dock.

But Carnival’s biggest government benefit of all may be the price it pays for many of those services. Over the last five years, the company has paid total corporate taxes â€" federal, state, local and foreign â€" equal to only 1.1 percent of its cumulative $11.3 billion in profits. Thanks to an obscure loophole in the tax code, Carnival can legally avoid most taxes.

It is an extreme case, but it’s hardly the only company that pays far less than the much-quoted federal corporate tax rate of 35 percent. Of the 500 big companies in the well-known Standard & Poor’s stock index, 115 paid a total corporate tax rate â€" both federal and otherwise â€" of less than 20 percent over the last five years, according to an analysis of company reports done for The New York Times by Capital IQ, a research firm. Thirty-nine of those companies paid a rate less than 10 percent.

Arguably, the United States now has a corporate tax code that’s the worst of all worlds. The official rate is higher than in almost any other country, which forces companies to devote enormous time and effort to finding loopholes. Yet the government raises less money in corporate taxes than it once did, because of all the loopholes that have been added in recent decades.

“A dirty little secret,” Richard Clarida, a Columbia University economist and former official in the Treasury Department under President George W. Bush, has said, “is that the corporate income tax used to raise a fair amount of revenue.”

Over the last five years, on the other hand, Boeing paid a total tax rate of just 4.5 percent, according to Capital IQ. Southwest Airlines paid 6.3 percent. And the list goes on: Yahoo paid 7 percent; Prudential Financial, 7.6 percent; General Electric, 14.3 percent.

Economists have long pleaded for an overhaul of the corporate tax code, and both President Obama and Republicans now say they favor one, too. But it won’t be easy. Companies that use loopholes to avoid taxes don’t mind the current system, of course, and they have more than a few lobbyists at their disposal.

The official position of the Business Roundtable, one of the most important corporate lobbying groups, is telling. The Roundtable says it supports corporate tax reform. But it actually favors only a reduction in the tax rate. The group refuses to say whether it also favors a reduction of loopholes. In effect, the Roundtable wants a tax cut for its members regardless of how much the tax code is simplified â€" or whether the budget deficit grows.

The tax filings of companies, like those of individuals, are confidential. In their public reports to investors, however, companies are required to list something called “cash taxes paid” â€" the total amount of corporate income tax they paid that year, be it to foreign governments, the United States government or state and local governments.

This number varies significantly from year to year, depending on how many loopholes a company qualifies for. So looking at a single year’s number is often misleading. But in a 2008 academic paper, three accounting professors â€" Scott Dyreng of Duke, Michelle Hanlon of M.I.T. and Edward Maydew of the University of North Carolina â€" suggested a new method for analyzing corporate tax avoidance.

It compares cash taxes paid over several years â€" like five, as in the analysis for The Times â€" to pretax earnings over that same period. The accounting experts I interviewed called it the best available method for looking at corporate taxes.

Some obvious patterns emerge. Companies that lost large amounts of money in previous years can subtract these subsequent losses from their initial profits and avoid taxes until they’re turning a consistent profit. Yahoo falls into this category. Of all the reasons to have a low tax rate, this one may be the most defensible, economists say.

Other companies are able to avoid taxes by spending large sums on new equipment or buildings. Such spending can often be deducted. Southwest Airlines, for instance, has bought a lot of planes in the last five years. Several energy companies with tax rates below 2 percent, like NextEra, Xcel and Range Resources, have likewise been expanding.

A third group of companies simply seems to have become expert at avoiding taxes. When the three accounting professors analyzed more than 2,000 companies, they found big variations in tax rates within almost every subset of companies. Companies in the same industry often paid very different rates, even when they were similar in size.

G.E. is so good at avoiding taxes that some people consider its tax department to be the best in the world, even better than any law firm’s. One common strategy is maximizing the amount of profit that is officially earned in countries with low tax rates.

Carnival pays so little tax partly because of a provision that lets some shipping companies legally incorporated overseas (Panama, in Carnival’s case) avoid taxes. The fact that Carnival’s executives sit in Miami and or that many passengers board in Baltimore, Los Angeles, Miami, New York and Seattle doesn’t matter. Nor does the fact that Carnival isn’t paying much tax in Panama.

Companies that pay relatively high rates tend to be those that are not expanding rapidly and that are not as ingenious as G.E., at least on taxes. The average total tax rate for the 500 companies over the last five years â€" again, including federal, state, local and foreign corporate taxes â€" was 32.8 percent. Among those paying more than the average were Exxon Mobil, FedEx, Goldman Sachs, JPMorgan Chase, Starbucks, Wal-Mart and Walt Disney.

The problem with the current system is that it distorts incentives. Decisions that would otherwise be inefficient for a company â€" and that are indeed inefficient for the larger economy â€" can make sense when they bring a big tax break. “Companies should be making investments based on their commercial potential,” as Aswath Damodaran, a finance professor at New York University, says, “not for tax reasons.”

Instead, airlines sometimes buy more planes than they really need. Energy companies drill more holes. Drug companies conduct research with only marginal prospects of success.

Inefficiencies like these slow economic growth, and they are the reason that both conservatives and liberals criticize the corporate tax code so harshly. Mitch McConnell, the Republican Senate leader, says it hurts job creation. Mr. Obama, in his State of the Union address, said that the system “makes no sense, and it has to change.”

A lot of economists agree. Then again, any system that creates as many winners as this one won’t be changed easily.

[BridgeTroll]

You can add to that the benefits of filing jointly, the benefits from having kids, and the mortgage interest tax deduction. Everything's a kickback until you're the one receiving it.

My bad... I meant Corporate tax loopholes...

[BridgeTroll]

This is the conclusion of a very long article.  Lots of good info here...

http://taxfoundation.org/publications/show/27081.html

An objective review of the budgetary cost of corporate tax expenditures reveals that the rhetoric surrounding corporate "loopholes" seems greatly exaggerated. The roughly $660 billion in total tax provisions benefiting corporations may seem large, but it is less than the $1 trillion value of the benefits individuals receive from the tax exclusion for employer-provided health care, and is comparable to the value of tax expenditures benefiting state and local governments.

Contrary to popular opinion, only about 8 percent of corporate tax expenditure benefits are targeted to specific industries such as renewable energy, insurance, oil and gas, and coal. Indeed, the benefits received by state and local governments are nearly twice the amount targeted to specific industries. The vast majority of tax expenditures are largely available to all corporations and industries.

With the mounting federal deficits, corporate tax expenditures have come under increased scrutiny as a potential source of new tax revenues. However, considering the fact the U.S. has one of the highest corporate tax rates in the world, lawmakers would be far wiser to consider reducing or eliminating them within the broader context of corporate tax reform and lowering the federal corporate tax rate.

[BridgeTroll]

http://www.youtube.com/v/KH3we8gD5mg

[JFman00]

You can add to that the benefits of filing jointly, the benefits from having kids, and the mortgage interest tax deduction. Everything's a kickback until you're the one receiving it.

My bad... I meant Corporate tax loopholes...

In both cases (personal and corporate tax advantages/loopholes), government is furthering what it judges to be a societal good. In your post you even point out who benefits. I bring this up because the argument in both cases is to eliminate the loopholes while lowering tax rates. In addition to avoiding preferential treatment under the current system of exemptions/deductions/credits, eliminating loopholes saves individuals and corporations money as they don't have to spend so much time and money to calculate what they owe.

Some proposals for revamping the tax code for individuals would require people to calculate tax three or more times (current system, alternative minimum tax and various versions of the fair tax). Corporations face a similar issue (paying an accounting/legal department to locate the various benefits they might be eligible for). In both cases, there are huge incentives to game the system to reduce tax burden.

To the comment above, "The vast majority of tax expenditures are largely available to all corporations and industries" the question I have is, then why have those tax expenditures at all? Just lower the rate while getting rid of the expenditure, instead of rewarding companies who hunt for every benefit they can and penalizing companies that don't.

[BridgeTroll]

I agree with what you are saying... especially... "Everything's a kickback until you're the one receiving it."  I only meant to clarify the topic as these things tend to... um... er... expand...

[JFman00]

I agree with what you are saying... especially... "Everything's a kickback until you're the one receiving it."  I only meant to clarify the topic as these things tend to... um... er... expand...

Roger :-P

[finehoe]

8 Ridiculous Tax Loopholes: How Companies Are Avoiding the Tax Man
From an overseas haven to a TARP gift to Nascar, companies are skirting the IRS. Here’s the most egregious ways corporations have worked the system to shortchange Uncle Sam.
by Josh Dzieza  | February 25, 2012 4:45 AM EST

On paper, the U.S. has one of the highest corporate tax rates in the world. But in practice, corporations pay far less. The Government Accountability Office (PDF) estimated the average tax burden at 25.2 percent, and some of the largest corporations, such as General Electric and Wells Fargo, pay no taxes at all. This is possible because the tax code is riddled with exceptions and loopholes, created at the behest of lobbyists and exploited by teams of tax experts, many of whom used to work for the IRS and the Treasury. With the help of Citizens for Tax Justice, The Daily Beast rounded up some of the most egregious corporate tax loopholes.

Deferral of Overseas Income

Multinational companies don’t have to pay U.S. income taxes on overseas profits until they transfer them back home. But in reality, companies just leave their profits in overseas tax havens, deferring taxes indefinitely. Not only that, an accounting scheme known as “transfer pricing” allows companies to move profits from the U.S. to offshore havens so they’re counted as overseas earnings. For example a pharmaceutical company could sell a drug patent to a subsidiary in the Cayman Islands for a nominal fee, then have the subsidiary charge the parent company huge licensing fees. The company can then deduct the licensing fees from its taxable income in the U.S. and send the profits to its foreign subsidiary, where taxes can be indefinitely deferred. Some 83 percent of top 100 publicly traded companies had tax-haven units in 2009, according to the GAO. General Electric, Google, Pfizer, and many other companies use this technique. The federal government loses an estimated (PDF) $100 billion a year through offshore tax abuses.

Deductions for Shipping Jobs Overseas

At first glance it doesn’t seem particularly egregious that corporations can deduct moving expenses, but that changes when the break is applied to companies moving operations overseas. President Obama proposed ending this exemption for companies moving overseas while giving a credit to companies moving back to the U.S.

The Domestic Production Deduction

This deduction was meant to encourage companies to keep manufacturing operations in the U.S. by allowing them to deduct profits from “qualified production activities.” But by the time the law was enacted, those activities had expanded to include not just manufacturing but everything from oil drilling to filmmaking to real estate. (Obama proposed barring oil and gas companies from using the deduction.) The Center on Budget and Policy Priorities estimated that the deduction cost states $500 million in 2011, and the Congressional Budget Office (PDF) estimates it will cost the federal government $163 billion over the next decade.
tax-loopholes-tease

Last-In, First-Out Accounting

Normally when you buy something for $30 and sell it for $50, you have to pay taxes on a $20 profit. But corporationsâ€"especially oil companiesâ€"manage their accounts differently. They might buy oil for $30 a barrel, and then buy some more for $45 a barrel later in the year. Then when they sell a barrel of oil for $50, they get to assume that they sold the last barrel they bought, the one that cost $45, allowing them to report a profit of $5 instead of $20. Citizens for Tax Justice estimates that the loophole is worth $97 billion over the next 10 years.

Punitive Damages Deduction

When corporations are hit with punitive damages, they’re able to write them off as an “ordinary and necessary” business expense (PDF). Consequently, Exxon’s $1.1 billion Alaska oil spill settlement actually cost the company $524 million after taxes. Obama’s budget proposes to eliminate the deductibility.

Accelerated Depreciation Deduction

This allows companies to deduct for the depreciation of a piece of equipment at a faster rate than it actually takes the equipment to depreciate. Because interest expenses are also deductible, a company can borrow money to buy equipment, deduct both the interest on the debt and the “accelerated” depreciation of the equipment, and claim deductions greater than the profits generated by the investment. It’s one of the loopholes that allow corporations to pay no taxes during profitable years.

Corporate Jet Deduction

The corporate jet deduction became a hot-button issue during the debt-ceiling debate when President Obama used it as leverage against the Republicans. Under the current law, corporations can claim deductions for the depreciation of their jets at a faster rate than commercial airlines can. Closing the loophole wouldn’t save much moneyâ€"about $4 billion over 10 yearsâ€"but as a political symbol, it’s invaluable. (For what it’s worth, yacht owners get an accelerated depreciation deduction plus a few more.)

NASCAR

The 71,000-page tax code is full of accelerated-depreciation loopholes for various industries. Along with corporate jets, NASCAR racetrack owners get a special exemption. They can deduct for the depreciation of their tracks over a seven-year period instead of the 39 years the government estimates (PDF) it actually takes them to depreciate. The break was put in place in 2004 but was renewed in the 2008 financial-system bailout known as TARP. It costs the government $40 million a year.


©2011 The Newsweek/Daily Beast Company LLC

[BridgeTroll]

http://vtdigger.org/2011/08/15/keelan-so-what-is-a-tax-loophole/

One of the many contentious points raised during the debt-ceiling debate was the closing of tax loopholes. So what exactly is a tax loophole? An Internet site defines a tax loophole as:

“ …Loopholes are special exceptions in the tax code which allow those who qualify, virtually always corporations and special categories of rich people, to escape paying part of their taxes…”
Not exactly!

Allow me to describe a few of the so-called tax loopholes and why they got created in the first place.

With the help of a 3/3/11 Wall Street Journal piece on tax reform, let’s look at the Whirlpool Corp. â€" the appliance manufacturer. Congress (and the environmental lobby) wanted to have energy efficient appliances…so, Congress passed a tax credit law. Build an energy-efficient refrigerator, washer/dryer and dishwasher and the manufacturer will receive $200, $225 and $75 in tax credits for each one produced.

In 2010, Whirlpool had $18 billion in sales, $619 million in earnings and paid 0 in taxes; the corporation had built up over $500 million in tax credits. Note that tax credits are a dollar for dollar offset against taxes due.

Now let us pay a visit to the oil and gas companies. A long time ago, in the 1920s, Congress wanted investors to take huge risks and develop oil and gas wells in order to feed the insatiable appetite for oil required by the emerging auto industry. The cause gave rise to what is known as “percentage depletion.” What it means is that for every $1 in oil revenue, 27 percent was eliminated for tax purposes (now 22 percent). No wonder oil companies have a low effective tax rate â€" when almost a quarter of their revenue is excluded from income.

And many of us drive by or walk by another tax-loophole benefit each and every day â€" they are residing in those historic downtown buildings that got rehabilitated over the past 40 years. Once again, Congress was lobbied, this time by preservation groups, wishing to preserve the downtowns (inner-cities) and historic structures. Congress abided and authorized that for every $1 invested, one would receive a tax credit of 20 cents against income taxes.

Another favorite tax loophole is tax-exempt bonds. Take two taxpayers: one has salary income from his/her business of $100,000, the second has a similar income from state of Vermont bonds. The former pays approximately $30,000 in taxes while the latter pays 0 in taxes. Now make the tax-exempt income not $100,000 but $10 million â€" get the picture?

However, my all-time favorite loophole event has to do with Warren Buffett, the Berkshire-Hathaway billionaire. He will often cite the fact that his secretary pays more in taxes than he does â€" and here’s why. In order to assist non-profits, a long time ago Congress passed a tax loophole which under certain circumstances donations to nonprofits can be deducted. Mr. Buffett took full advantage of this and donated over $30 billion to The Bill and Melinda Gates Foundation. The gift was so large (there are annual limitations on how much one can deduct each year) that for the foreseeable future, Mr. Buffett can offset his millions in yearly earnings with the carry-over (unused) deduction made to the Gates Foundation.

The point in noting all of the above (and there are many more) is simple â€" as long as we have lobbyists advocating their cause in Washington for business, education, health care, nonprofit, pharmaceutical, defense and environmental organizations and companies, we will have “loopholes.”

If we really want to do something about taxes and “loopholes” here are a few suggestions:

1.Phase in over five (it may take 10) years the “sunsetting” of the 1986 U.S. Tax Code.
2.Phase in over a similar period a flat tax system whereby all income, regardless of source, is taxed at a flat tax rate.
3.Phase in over the same period the elimination of all deductions, exemptions and tax credits.
The original Tax Code of 1913 was meant to raise revenue for the federal government â€" not to be the reservoir for every conceivable social, economic, environmental and energy program.

And as recently as last week, President Barack Obama proposed a tax credit to companies who hire veterans â€" using the tax system to execute a social/economic goal.

[BridgeTroll]

8 Ridiculous Tax Loopholes: How Companies Are Avoiding the Tax Man
From an overseas haven to a TARP gift to Nascar, companies are skirting the IRS. Here’s the most egregious ways corporations have worked the system to shortchange Uncle Sam.
by Josh Dzieza  | February 25, 2012 4:45 AM EST

On paper, the U.S. has one of the highest corporate tax rates in the world. But in practice, corporations pay far less. The Government Accountability Office (PDF) estimated the average tax burden at 25.2 percent, and some of the largest corporations, such as General Electric and Wells Fargo, pay no taxes at all. This is possible because the tax code is riddled with exceptions and loopholes, created at the behest of lobbyists and exploited by teams of tax experts, many of whom used to work for the IRS and the Treasury. With the help of Citizens for Tax Justice, The Daily Beast rounded up some of the most egregious corporate tax loopholes.

Deferral of Overseas Income

Multinational companies don’t have to pay U.S. income taxes on overseas profits until they transfer them back home. But in reality, companies just leave their profits in overseas tax havens, deferring taxes indefinitely. Not only that, an accounting scheme known as “transfer pricing” allows companies to move profits from the U.S. to offshore havens so they’re counted as overseas earnings. For example a pharmaceutical company could sell a drug patent to a subsidiary in the Cayman Islands for a nominal fee, then have the subsidiary charge the parent company huge licensing fees. The company can then deduct the licensing fees from its taxable income in the U.S. and send the profits to its foreign subsidiary, where taxes can be indefinitely deferred. Some 83 percent of top 100 publicly traded companies had tax-haven units in 2009, according to the GAO. General Electric, Google, Pfizer, and many other companies use this technique. The federal government loses an estimated (PDF) $100 billion a year through offshore tax abuses.

Deductions for Shipping Jobs Overseas

At first glance it doesn’t seem particularly egregious that corporations can deduct moving expenses, but that changes when the break is applied to companies moving operations overseas. President Obama proposed ending this exemption for companies moving overseas while giving a credit to companies moving back to the U.S.

The Domestic Production Deduction

This deduction was meant to encourage companies to keep manufacturing operations in the U.S. by allowing them to deduct profits from “qualified production activities.” But by the time the law was enacted, those activities had expanded to include not just manufacturing but everything from oil drilling to filmmaking to real estate. (Obama proposed barring oil and gas companies from using the deduction.) The Center on Budget and Policy Priorities estimated that the deduction cost states $500 million in 2011, and the Congressional Budget Office (PDF) estimates it will cost the federal government $163 billion over the next decade.
tax-loopholes-tease

Last-In, First-Out Accounting

Normally when you buy something for $30 and sell it for $50, you have to pay taxes on a $20 profit. But corporations—especially oil companies—manage their accounts differently. They might buy oil for $30 a barrel, and then buy some more for $45 a barrel later in the year. Then when they sell a barrel of oil for $50, they get to assume that they sold the last barrel they bought, the one that cost $45, allowing them to report a profit of $5 instead of $20. Citizens for Tax Justice estimates that the loophole is worth $97 billion over the next 10 years.

Punitive Damages Deduction

When corporations are hit with punitive damages, they’re able to write them off as an “ordinary and necessary” business expense (PDF). Consequently, Exxon’s $1.1 billion Alaska oil spill settlement actually cost the company $524 million after taxes. Obama’s budget proposes to eliminate the deductibility.

Accelerated Depreciation Deduction

This allows companies to deduct for the depreciation of a piece of equipment at a faster rate than it actually takes the equipment to depreciate. Because interest expenses are also deductible, a company can borrow money to buy equipment, deduct both the interest on the debt and the “accelerated” depreciation of the equipment, and claim deductions greater than the profits generated by the investment. It’s one of the loopholes that allow corporations to pay no taxes during profitable years.

Corporate Jet Deduction

The corporate jet deduction became a hot-button issue during the debt-ceiling debate when President Obama used it as leverage against the Republicans. Under the current law, corporations can claim deductions for the depreciation of their jets at a faster rate than commercial airlines can. Closing the loophole wouldn’t save much money—about $4 billion over 10 years—but as a political symbol, it’s invaluable. (For what it’s worth, yacht owners get an accelerated depreciation deduction plus a few more.)

NASCAR

The 71,000-page tax code is full of accelerated-depreciation loopholes for various industries. Along with corporate jets, NASCAR racetrack owners get a special exemption. They can deduct for the depreciation of their tracks over a seven-year period instead of the 39 years the government estimates (PDF) it actually takes them to depreciate. The break was put in place in 2004 but was renewed in the 2008 financial-system bailout known as TARP. It costs the government $40 million a year.


©2011 The Newsweek/Daily Beast Company LLC

From what I can see... all of these are examples of... "be careful what you ask for... you just might get it.  I bet most of these loopholes were designed to fix some percieved unfairness or give incentive.  Rather than simply list these as ridiculous... I would like to see why they exist... what they are designed to do... why are they missing the mark.

[JFman00]

It's like earmarks, everyone is going to use them until they can't, and no one wants to be *that guy*.

[BridgeTroll]

I thought this one looked fishy...

Corporate Jet Deduction

The corporate jet deduction became a hot-button issue during the debt-ceiling debate when President Obama used it as leverage against the Republicans. Under the current law, corporations can claim deductions for the depreciation of their jets at a faster rate than commercial airlines can. Closing the loophole wouldn’t save much moneyâ€"about $4 billion over 10 yearsâ€"but as a political symbol, it’s invaluable. (For what it’s worth, yacht owners get an accelerated depreciation deduction plus a few more.)

If I remember correctly... The deduction was passed in order to make buying jets more attractive. The figuring was that this would give a boost to the corporate jet makers who are mainly domestic.  Seems to me congress (democrats?) created the loophole to protect American corporate jet manufaturers and the jobs associated with them.