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Let’s Go Racing for Loopholes – Motorsports Tax Scam Wins a Grafty

Everyone knows that the tax code is too complicated. The New York Times reports that the IRS national tax advocate, Nina Olson, is calling for a rewrite.

Ms. Olson found that the volume of the tax code had nearly tripled in size during the last decade — to 3.8 million words in February 2010 from 1.4 million in 2001.

One big cause of that staggering length is loopholes. You can’t just say that Company X gets to pay less than everyone else, you have to narrow it down while seeming to remain general. Here’s an example. The general rule is that businesses get a deduction for depreciation. Race tracks get a special loophole that enables them to write off their facilities faster than other businesses.

To explain depreciation, let’s start with an unreal example. If you buy a machine for your business for $5000, you get to write off $1000 each year for five years, using straight-line depreciation. If you make a profit of $2000 each year, you pay taxes on $1000 in each of those years. The theory is that the value of the asset declines through use and obsolescence, so it seems fair to reduce profits to represent that expense. Of course, if a little of this is good, more is better. Lobbyists argue that companies will buy more equipment if they can write it off faster. Buying more now is supposedly good for the economy. Politicians accept that argument for whatever reason.

That leads to a more complicated treatment of depreciation. IRC § 168, about 15,000 words of it, provides for accelerated depreciation of most property, using a method called double-declining balance, with the assumption that the equipment is completely worthless after 5 years.

wealthy welfare award

(image: twolf1)

In our unreal example, straight-line depreciation over 5 years results in a depreciation of 20% of the purchase price each year. With double declining balance depreciation, the deduction each year is 40% of the balance of the purchase price. In the first year, the balance is $5000, the purchase price, and the deduction is 40% of that, $2000. The balance the second year is $3000, the deduction is 40% or that, $1200. In the third year, the balance is $1800 and the deduction is $720. And so on.

Even better, IRC § 179 permits a business to write off the entire amount of the purchase in the first year for some assets up to a certain limit.

Improvements to real property, like, say, concessions buildings and garages at race tracks, are classified as non-residential estate, and are written off using straight line depreciation over 39 years. Other improvements, like parking lots, safety fences and grandstands, would be written off over their expected lives, using either straight-line or 150% declining balance depreciation.

There is a special rule for Motorsports Entertainment Complexes, allowing their buildings, grandstands, parking lots and other improvements to be written off over 7 years. IRC § 168(e)(3)(c)(ii). To write the limitation so that it mainly affected auto race tracks, as opposed to dog tracks, took 213 words in IRC § 168(i)(15). The provision was set to expire December 31, 2009, but it was extended to 2011 by § 738 of the Obama Tax Capitulation Act of 2010, more politely known as Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

One of the fun parts of tax issues is to see who benefits from a loophole. The obvious answer is International Speedway Corporation, the publicly held company that owns a bunch of NASCAR tracks, including Daytona, Talladega, Michigan International, Darlington and Watkins Glen. 2009 10-K, p. 1. The company says it expects capital expenditures on improvements to existing facilities of $70-80 million in 2010, and more on longer term projects. 3Q 2010 10-Q, p. 36. That should net a deduction of 40%, or $28 to $32 million as the property is placed in service. If all of it were 39 year property subject to straight-line depreciation, it would have been $1.8 to $2.0 million.

I refuse to believe that the availability of this deduction made the slightest difference in the budgeting decisions of International Speedway Corporation. This budget was set with full knowledge that the loophole would expire at the end of 2009, and projects were going forward without the exemption. The loophole did not create a single job. The extension is a pure gift to the company.

Another possible winner is Gresham Motorsports Park, which is renovating a racetrack that charges admissions to watch car races. It’s located in Dawsonville, GA, home of the Georgia Racing Hall of Fame. Dawsonville is also home to this track, currently under construction. The owner won’t qualify for the loophole because it won’t have spectator races. Maybe they should talk to an accountant. After all, they are providing a real service, a place to drive your Lotus Elise or your Corvette flat out.

[ed. note: This is another post in Firedoglake’s semi-regular series exposing and exploring ways in which the federal government spends vast sums or forsakes vital revenue in a perpetual, profligate and pathetic quest to assure corporate America that the elected representatives of we the people are really, truly, madly, deeply “business friendly.” With each story, we hope to highlight another government giveaway, tax break, or loophole handcrafted by lawmakers and lobbyists to keep the powerful powerful and make the rich richer. If the reverse Robin Hoodism rises to special heights, we will present it with the FDL Wealthy Welfare Award—or, as we have taken to calling it back here, The Grafty.

As the government works its way up to what will almost certainly be an unprecedented season of deficit peacockery–no doubt resulting in a calls for cuts to Social Security, Medicare, and the other guylines of our social safety net–remember the Grafties, where real money is available to meet our obligations without taking even more away from those who can least afford to lose.]

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