Corporate taxes are levied upon corporate profits, not revenue. Profit is the money "left over" after expenses have been paid out of revenue. There are easily understandable expenses like payroll, rent, heat, light, advertising and so on.
Then we have depreciation, a biggy. And adjustable to suit the guy doing the books. What is depreciation? Suppose a company owns an expensive machine, say a blast furnace or a locomotive, or a CNC machine. These things have a definite service life, they wear out with use. Wise companies prepare for the day when an expensive replacement must be paid for, by setting aside some money each year so that there will be enough money to pay for the replacement. Otherwise the company will go out of business when the key machine wears out.
This set aside money, called depreciation, reduces profit. Set aside a million dollars, and reported profit goes down by a million dollars. So how much to set aside? Depends upon who I show the books to. When showing the books on Wall Street, I want to convince investors that my company is making lots of money, so I depreciate as little as I dare. When showing the books to the taxman, I want to show little profit to reduce my taxes.
Incidently, we would be better off if taxes were levied upon the books shown to Wall Street. Right now the IRS permits depreciation that the SEC does not. The books would be more honest if the desire to show a high profit on the street was balanced by the desire to show poverty to the taxman.
Obama released his corporate tax reform plan the other day. He is going to reduce the rate, (Hurrah) AND, in dozens of pages of obfustication, he is going to change the rules for depreciation. I read thru some of it. You gotta be a better lawyer and accountant than I am (I'm an engineer) to figure out if corporate taxes are going up or going down.
The economy would grow more, if taxes were predictable, and understandable. Obama's changes make taxes less predictable and un computable. After your expert and expensive tax accountant does the company's taxes, some IRS bureaucrat will demand more money. And he will point to some obscure paragraph in the 10,000 page tax code to support his claims. And the company will pay up because going to court is too expensive and too risky to be worth it.
Visualize a would be entrepreneur brainstorming his new idea. "And how much will our taxes be?" some one asks. "Who knows?" is the correct answer. "Is this business plan going to make any money?" someone asks. "Who knows." is the reply.
Question: is that startup company going to launch?
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